Question

Assume you are doing a financial analysis for Kroger Inc. Here is one of the income statements that you analyze (all figures in $ Millions):

year	2006	2005	2004
total sales	60,553	56,434	53,791
cost of goods sold	45,565	42,140	39,637
seeling, general &admin expenses	11,688	12,191	11,575
depreciation	1,265	1,256	1,209
operating income	2,035	847	1,370
other income	0	0	0
ebit	2,035	847	1,370
interest expense	510	557	604
earnings before tax	1,525	290	766
taxes (35%)	534	102	268
net income	991	189	498

Based on your analysis of the income statements. What can be said about the progress. Which areas are improving? Sales increased from 2004 to 2005 yet net profit decreased . Why do you think they decreased net income in 2005 with higher sales. sales? 2006 seems to be better. What did the fix?

Answer 1

year	2006	2005	2004	2006	2005	2004
total sales	60,553	56,434	53,791	100.00%	100.00%	100.00%
cost of goods sold	45,565	42,140	39,637	75.25%	74.67%	73.69%
seeling, general &admin expenses	11,688	12,191	11,575	19.30%	21.60%	21.52%
depreciation	1,265	1,256	1,209	2.09%	2.23%	2.25%
operating income	2,035	847	1,370	3.36%	1.50%	2.55%
other income	0	0	0	0.00%	0.00%	0.00%
ebit	2,035	847	1,370	3.36%	1.50%	2.55%
interest expense	510	557	604	0.84%	0.99%	1.12%
earnings before tax	1,525	290	766	2.52%	0.51%	1.42%
taxes (35%)	534	102	268	0.88%	0.18%	0.50%
net income	991	189	498	1.64%	0.33%	0.93%

While analyzing common size income statement we can observe that there is 1% increase in cost of good sold with respect to sales which reduces the operating income by 1% and similar trend observed in EBT that decrease the EBT to .5% of sales. Thats why new profit decreased in 2005 with respect to 2004.

Though cost of good sold is higher than 2005 and 2004 but there is huge reduction in SGA expenses with respect to sales by almost 2.3% from previous year which is further reflected into operating income and EBT. That's why there is huge increase in net income of company.