Kohl’s Corporation and Dillard’s, Inc. —
Financial Statement Analysis

EXCERPTED WITH PERMISSION FROM

CASES IN FINANCIAL REPORTING

SEVENTH EDITION
ISBN: 978-1-934319-79-6

ELLEN ENGEL
D. ERIC HIRST
MARY LEA MCANALLY

© Copyright 2012 by Cambridge Business Publishers, LLC. All rights reserved. No part of this publication may be reproduced in any form for any purpose without the written permission of the publisher. This document is authorized for use by michelle jeffalone, from 9/1/2014 to 12/31/2014, in the course:
Accounting for Managers, University of Massachusetts - Boston.
Any unauthorized use or reproduction of this document is strictly prohibited.

Kohl’s Corporation and Dillard’s Inc.—
Financial Statement Analysis
Kohl’s …show more content…

The fourth term is the asset turnover ratio, a measure of overall efficiency in asset use. The product of the third and fourth terms is operating return on assets.
The final ratio captures the leverage of the firm—a measure of how the firm has paid for its assets. The ratio increases as the firm takes on more debt (that is, for a fixed level of equity, more assets must mean more debt). Note that the final term is equal to 1 + (Average total liabilities / Average stockholders’ equity). Normally, analysis of the financial statements begins with operating return on sales and asset turnover
(thus, operating return on assets). Then it turns to leverage (liquidity and solvency) and the cost of leverage. Finally, a review of the tax burden is conducted. The ROE analysis can be followed up with an analysis of the company’s cash flows.
d. Compute return on equity (ROE) for both companies for fiscal 2007 and 2006. Calculate the five components of ROE and verify that their product equals ROE. Remember to use average total assets and average stockholders’ equity in your ratio calculations.
e. Refer to the common-sized income statement you prepared in part c and your ROE decomposition from part d.
i.

What trends do you notice in the ROE subcomponents for each firm over time?

ii.

Which firm is more profitable? Consider profitability in terms of overall ROE, operating return on sales (and insights from common-size income statements), and operating return on assets
(that is,