After establishing that Macy's and JCPenney have adequate internal controls and use an independent public accounting firm to confirm the accuracy of reports, the next step is to examine the relationship among financial statement numbers and the trends in those numbers over time. "Financial statement analysis is used to evaluate the performance of a company with an eye toward identifying problem areas and to use the past performance of a company to predict how the company will do in the future" (Albrecht, Stice, Stice, & Swain 2005). This paper will analyze Macy's and JCPenney financial statements by using financial ratios to determine profitability, liquidity, efficiency and turnover, and leverage.
So how do the companies compare using the profitability ratio? JC Penney's net profit margin (also called return on sales) was 5.8% for 2006 and 2005 while Macy's was 6.2% and 3.6% for those same years. The return on equity or the amount of profit earned per dollar of investment was 26.9%
for 2006 and 27% for 2005 for JCPenney and 8% and 10.4% for Macy's. JCPenney's return on assets was 11.2% for 2006 and 10% for 2005. Macy's return on assets was 4.9% and 5.5%. These figures indicate JC Penney is a very profitable company. While these two companies are reasonably the same on net profit margin, JCPenney clearly outperforms Macy's in return on equity and return on assets. Investors clearly are interested in how much profit they earn for each dollar invested. During this period, JCPenney offers a strong return for the investment. Investors must keep in mind that a key transaction by Macy's has been the purchase of May's 500 department stores and 800 bridal and formalwear stores for approximately $11.7 billion on August 30, 2005. How this transaction plays out remains to be seen.
Looking at liquidity...