Tractor Supply Company Case Study

Introduction

Tractor Supply Company Limited is one of the largest company operating in the rural retail stores in the USA where it serves its customers with more products and services in the agricultural sector. The company was started 1938 with the sale of tractors parts and currently, it operates more than 1700 stores in 49 states in the US. The company is mainly focused on ensuring the supply of various recreational farmers and ranchers with all their needs who need to enjoy the rural lifestyle in agriculture. The main products include livestock, fencing products, pumps, irrigation parts, pets, maintenance parts, tools and trucks which all have provided good income to the organization (Bahremand & Karimi, 2018) . Currently, the company has annual revenue of more than $ 7.91 billion which has been attributed to high-quality products and services as well as loyal customers in the market. As part of the company diversification strategy, it is continuously growing new stores and ensuring product improvement in the region. Tractor Supply Parts Company has prepared correct and accurate financial statements that will be used to conduct ratio analysis to understand the financial performance in details. 

Financial Statements Overview

Tractor Supply Company Limited management has had the sole responsibility for ensuring that there are strong and adequate internal controls concerning financial reporting and financial statements. There are various financial statements such as income statements, balance sheet, and cash flow statements among others which helps to provide more financial analysis. As part of the financial statement review, net sales increased by 7.6% in the first quarter of 2018 which was a positive indicator of strong financial performance in the market (Bromiley, McShane, Nair, & Rustambekov, 2015) . The management has therefore indicated they have been pleased with the financial performance since it has achieved higher revenue generation as well as expenses minimization in the market. 

In addition, gross profit also increased by 8.8% from $ 518.2 million to $ 563.6 million that will assist in ensuring a higher return on investment for the shareholders (Bahremand & Karimi, 2018) . The increase in gross profit can be attributed to an increasing in sales as well as the production of high-quality products which has the ability to meet and exceed customers' needs and demands. Another notable point concerned income tax which reduced from 35.6% to 20.9% which can be attributed to a decrease in effective income tax which was signed into law ( Flood, Jagadish & Raschid, 2016).

Pro Forma Financial Statements

Pro forma financial statements is a report that is prepared based on estimates and assumptions hence it is not an official GAAP statement that will be issued to investors in the market. It is, therefore, a tool created by the company management that will help to project future financial performance in the near future. Lu, W., Ye, M., Chau, & Flanagan, 2018). The statements are prepared on the excel sheet. 

Pro-forma Invoice

	Historical Periods			Forecasted period
Details	2015	2016	2017	2018
Net sales	6226507	6779579	7256382	79822020
Cost of goods sold	4083333	4454377	4764417	528850287
Gross profit	2143174	2325202	2491965	2693517.13
Selling and administration expense	1369097	1488164	1639749	1803723.9
Depreciation expense	123569	142958	165834	182417.4
Operating income	650508	696080	686382	707375.83
Interest expense	2891	5810	13859	15244.9
Income before tax	647617	688270	672523	692130.93
Income tax	237222	251150	249924	27491666.4
Net income	410395	437120	422599	417214.53

CURRENT ASSETS
	2018	2019
Cash and cash equivalents	63,813	51,134
Inventories	1,284,375	1,115,450
Prepaid expenses and other current assets	87,510	66,444
Income taxes receivable	3,763	0
Total current assets	1,439,461	1,273,990
Property and equipment
Land	86,991	79,571
Buildings and improvements	814,802	698,462
Furniture, fixtures and equipment	523,383	453,692
Computer software and hardware	180,020	154,818
Construction in progress	38,720	30,803
Property and equipment, gross	1,643,916	1,417,346
Accumulated depreciation and amortization	-796,340	-696,346
Property and equipment, net	847,576	721,000
Goodwill and other intangible assets	10,258	10,258
Deferred income taxes	55,194	8,782
Other assets	18,337	20,541
Total assets	2,370,826	2,034,571
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	427,249	370,823
Accrued employee compensation	42,684	37,056
Other accrued expenses	195,024	182,565
Current portion of long-term debt	0	NA
Current portion of capital lease obligations	878	213
Income taxes payable	5,449	12,436
Total current liabilities	671,284	603,093
Long-term debt	150,000	0
Capital lease obligations, less current maturities	16,992	4,957
Deferred rent	84,793	79,807
Other long-term liabilities	54,463	53,153
Total liabilities	977,532	741,010
Stockholders' equity
Preferred stock	0	0
Common stock	1,352	1,342
Additional paid-in capital	596,131	510,997
Treasury stock	-1,429,790	-1,137,085
Accumulated other comprehensive income	0	NA
Retained earnings	2,225,601	1,918,307
Total stockholders' equity	1,393,294	1,293,561
Total liabilities and stockholders' equity	2,370,826	2,034,571

Ratio Analysis

Liquidity Ratios

These liquidity ratios normally help to determine the ability of a company to pay various financial obligation using the available resources and current assets. In other words, liquidity is not all about how much finances a company has but it will deal with measures of how easy it will be to convert various current assets into cash ( Edwards, Schwab & Shevlin, 2015).

Current Ratio

Tractor Supply Company Limited will use 2017 financial statements to conduct ratio analysis in the market. 

Current ratio= current assets/ current liabilities

1655368/849214= 1.94

The ratio indicates that the company's current assets are enough to cater to the current liabilities within the organization. Therefore, the company has more current assets hence in a better financial position.

Quick Ratio

It is a liquidity ratio that mainly measures the ability of a company to repay the current liabilities using current assets except for inventories.

= total current assets- inventories/ current liabilities

(1655368-1453208)/ 849214= 0.24

Financial Leverage Ratios

Financial leverage ratios are used to measure the ability of an organization to always meet its long-term debt financial obligations like interest in any financial year. 

Debt Ratio

It is a solvency ratio that normally measures a company's total liabilities as a percentage of the total assets therefore, it shows the ability of a company to pay its current liabilities using the available assets.

= total liabilities/ total assets

849214/1655368= 0.51

Tractor Supply Chain Company has a lower debt ratio which implies better financial stability.

Debt to Equity Ratio

The debt to equity ratio is a financial leverage ratio that aims to compare the firm's total debt to total equity. Higher debt to equity ratio means more creditor financing will be used.

Total liabilities/ total equity

849214/ 1418673= 0.60

Asset Management Ratio

These are ratios which normally attempts to measure the ability of a company to manage the available assets in order to generate the required sales level.

Receivables Turnover

The ratio normally tries to evaluate the firm’s supervision of its accounts receivables hence credit policy. A greater receivables turnover, the better a company will be at collecting its debtors within a short time.

Sales/ accounts receivables

7256382/ 4760= 1524

The ratio is very high meaning the company takes more time to recover its accounts receivables. 

Inventory Turnover

= cost of goods sold/ inventory

4764417/ 1453208= 3.29

The company has a lower inventory turnover meaning it will require less time before converting inventory into cash.

Profitability Ratios

Profitability ratios normally assess a company's ability to generate enough earnings that will provide higher profitability.

Gross Profit Margin

Gross profit/sales* 100%

2491417/ 7256382*100%= 34.3%

The Tractor Supply Company has a higher gross profit margin in the market.

Return on Assets

Return on assets

Net profits/total assets

422599/ 2868769= 0.15

Market Value Ratios

Market value ratios normally try to analyze the current share price of the company which are used by the investors to understand if the firm's shares have been underpriced or overpriced

Price Earnings Ratio

The price Earnings ratio is normally calculated using the current market price of the shares and net income. It will always show how much the company and investors are willing to pay. In most cases, the ratio is associated with growth.

Price per share/ Earning per share

Earning per shares= net income/ number of shares

Earning per shares= 422599/ 169943= 2.5

PE ratio= 1.2/ 2.5= 0.48

Dividend Yield Ratio

The ratios normally try to show the number of dividends that an organization can pay to its investors using the market price.

Dividends paid per share/ market price of the shares

2.5/3.1= 0.81

Debt Ratio

Debt Ratio

=total liabilities/ total assets

849214/1655368= 0.51

Debt to Equity Ratio

It is a ratio that tries to compare the firm's total debt with the total equity which will help to highlight the portion of financing that mainly comes from creditors and other investors.

Total liabilities/ total equity

849214/ 1418673 =0.60

Per-share Ratios

Price Earnings Ratios

Price per share/ Earning per share

Earning per shares= net income/ number of shares

Earning per shares= 422599/ 169943= 2.5

PE ratio= 1.2/ 2.5= 0.48

Earnings per Share

= total earnings/ outstanding shares

2829220/ 169943= 16.64

Measures of Relative Value Ratios

PE Ratio

Price per share/ Earning per share

Earning per shares= net income/ number of shares

Earning per shares= 422599/ 169943= 2.5

PE ratio= 1.2/ 2.5= 0.48

P/B Ratio

Market price per share/book value per share

3.4/2.5= 1.36

Activity Ratios

Total asset turnover

It measures the ability of Tractor Supply Company to generate enough sales using the available assets.

Net sales/ total assets

7256382/ 2868769= 2.53

Accounts Payable Turnover

It is a ratio that normally measures the number of times an organization is able to pay its creditors.

Cost of goods sold/accounts payable

4764417/576568= 8.26

Cash Flow

Operating Cash Flow Ratio

Operating cash flow= cash flow from operations/current liabilities 

631450/ 849214= 0.74

Price/ cash flow ratio

Share price/ cash flow per share

2.3/3.4= 0.68

DuPont System for ROI Analysis

The DuPont analysis is a technique used to evaluate various components of a firm's return on equity in any financial year. It will, therefore, allow an investor to always determine various financial activities that are involved. In addition, Tractor Supply Company management can use Dupont analysis to understand various strengths and weakness. 

Net Profit Margin

Net income/revenue*100%

422599/7256383*100%= 5.82%

Asset Turnover Ratio

Revenue/average total assets

7256383/ 2868769= 2.52

Economic Value Added (EVA)

Economic value added normally measures the firm's financial performance based on the main residual wealth that is normally deducted the cost of capital.

Net profit after tax- (capital invested*WACC)

WACC= cost of debt* (1-tax)* debt+ cost of equity* proportion of equity

10%(1-30%)*401069/ 1418673+ 12% * 1418673/ 401069

0.1*0.7*0.28+ 12%*3.53

0.0196+ 0.42= 0.44

422599-(563555*0.42)

422599-236693.1=185905.9

Synopsis of the Finding

Tractor Supply Company which was founded in 1938 has been providing high-quality products and services to its customers in the market. There was a financial analysis that was conducted to understand the performance of the company in the market. The management has the sole responsibility of ensuring true and fair financial statements has been prepared in the market. There are also very strong internal controls which have facilitated the growth and development of the company in the market. With the assumption of 10% growth in pro forma financial statements, they will help to ensure that the company work head to achieve and maintain the good performance of the market.

The first major finding concerned liquidity ratio which is used to measure the financial obligation of the organization. The current ratio of the organization is 1.94 which is a positive figure that will help to meet all the financial obligation of the company in the market. Therefore it implies that the current assets are more than current liabilities in the market. The quick ratio is 0.24 indicating that the Tractor Supply Company has had various issues in repaying all the current liabilities. It is, therefore, a major liquidity problem which can affect the going concern of the organization.

Tractor Supply Company has also been highly levered in order to be able to support all the necessary operation and activities within the company. Debt ratio will always quantity the ability of a firm to cater to all the liabilities compared to the assets. The debt ratio is 0.51 which implies that the company is in a better financial position where the available assets can be used to generate enough revenue to support operations. In addition, debt to equity is also part of the financial leverage ratio which is 0.60 indicating that part of financing has been acquired from other creditors due to financial constraint. It is very important for the management to always ensure that the company is not highly levered to avoid any financial issues which may arise within the company. They should always be maintained at a manageable level in the market.

Receivables turnover for Tractor Supply Company is 1524 meaning that the company takes a lot of time to convert their debtors into cash which will limit them from accessing the available cash in the company. It is the role of the management to reduce the credit policy to ensure there are no bad debts within the company. Inventory turnover is a very important ratio both to the management and the shareholders as it normally helps to reveal the much-needed information. Inventory turnover has been 3.29 for the 2017 financial year which means that the firm can convert the available inventory within a short time which will help to increase sales hence profitability. Due to lower inventory turnover, the gross profit margin is also high which 34.3% indicating better financial performance is. In addition, o.15 return on assets means that the company can use the available resources such as assets to generate enough revenue.

Price Earnings ratio and dividend ratio also both indicate the shareholders can receive a better return on investment for the organization. There are also other activity ratios such as total asset turnover which mainly measures the capacity of a firm to create necessary and enough revenue using the assets. It was 2.53 meaning the company has a better ability to generate enough revenue within a short time hence better financial stability. Accounts payable is 8.26 meaning the company will require a number of days to pay back the funds from the creditors.

Recommendations

The management should always ensure that only the right and qualified employee have been hired to ensure that the business operations have been carried out in the best way possible. In addition, the company should avoid been highly levered where it can issue an initial public offer to members of the public to acquire more funds. The liabilities and other expenses should always be controlled and monitored. In addition, the management should also ensure there is an increase in product diversification that will provide high-income stream within the organization.

Financial risk for Operating Internationally

Since Tractor Supply Company only operates in US cities, it would have faced various international risk such as foreign exchange risk which would occur when the value of the company's investment fluctuates in the international market due to change in the currency exchange rate. In case domestic currency appreciates as compared to foreign currency, the profit that was supposed to be earning in the domestic currency will eventually decrease. Political risk also acts as a financial risk which occurs when there is no political stability in an organization hence poor financial performance. Another financial risk is high labor cost in different states which will be governed by labor laws. Finally, high taxation is also another financial risk which will affect the business operations of the organization.

Conclusion

Tractor Supply Company is one of the largest company that operates in most of the rural area of the US. It was founded in 1938 where the main products include: maintenance parts, irrigation parts, fencing products and pumps where the annual turnover revenue of $ 7.91 billion was recorded. There are various financial statements prepared in accordance with international accounting standards such as income statements and balance sheet which help to reveal the financial position and performance of the organization. A close look at liquidity, leverage, profitability and asset management will indicate good performance in the market. For example, the current ratio of 1.94 indicates that the company has enough current assets to finance and support the available current liabilities. Some of the main financial risks the company would face operating in the international market include exchange rate risk, political risk and currency crisis which would affect the operations of the company. In addition, high taxation and labor cost will also affect the company since it will be exposed to different international standards in the market. In such a case, it is very important for the management to ensure that all the international business expansion are properly monitored and controlled for the welfare of the organization. Since the shareholders expect a higher return on investment, they will be expected to ensure higher sales and minimization of expenses.

References

Bahremand, M., & Karimi, R. (2018). Providing financial flow management strategies in supply chain projects.  Industrial Engineering & Management Systems ,  17 (1), 155-163.

Bromiley, P., McShane, M., Nair, A., & Rustambekov, E. (2015). Enterprise risk management: Review, critique, and research directions.  Long range planning ,  48 (4), 265-276.

Edwards, A., Schwab, C., & Shevlin, T. (2015). Financial constraints and cash tax savings.  The Accounting Review ,  91 (3), 859-881.

Flood, M. D., Jagadish, H. V., & Raschid, L. (2016). Big data challenges and opportunities in financial stability monitoring.  Banque de France, Financial Stability Review ,  20 .

Lu, W., Ye, M., Chau, K. W., & Flanagan, R. (2018). The paradoxical nexus between corporate social responsibility and sustainable financial performance: Evidence from the international construction business.  Corporate Social Responsibility and Environmental Management ,  25 (5), 844-852.