Best Buy Co. Inc.’s Finances and Investment

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Table of Contents

Business and financial environment
Gross and net working capital
Adjusting working capital
Financial ratios
Capital budget
Conclusion
References

Business and financial environment

Best Buy Co., Inc. is a multinational company that is based in the US. It was founded in the year 1966 as Sound of Music. Further, it is a public company that trades on the New York Stock Exchange with the ticker symbol BBY (Best Buy Co. Inc., 2017). The company has over one thousand stores in several countries across the globe. It deals with the sale of consumer electronics and other related merchandize. It also manufactures commodities under eight house brands. The entity has engaged about 125,000 employees. Some of its key competitors are Amazon.com, Inc., eBay Inc., NewEgg, Walmart, Target, and Sears among others. From a financial perspective, the total assets for the year 2016 amounted to $13,856 million, while the total equity was $4,709 million (Best Buy Co. Inc., 2017). The total revenue that was generated in the year 2016 amounted to $39,403 while the net earnings amounted to $1,228 million (Best Buy Co. Inc., 2017). A further review of the financial statement shows that there was a significant decline in revenue between the year 2012 and 2016. This paper seeks to carry out a financial analysis for Best Buy Co., Inc. It will also carry out an investment appraisal of the project that they intend to undertake.

Gross and net working capital

Gross working capital is the sum of the current assets. From the recent financial statement, the total current asset in the financial year 2015 amounted to $9,886 million. The value rose to $10,516 million in 2016. On the other hand, net working capital is the difference between gross working capital and current liabilities. The net working capital in 2015 amounted to $2,961 million (9,886 – 6,925) while in 2016 it totaled to $3,394million (10,516 – 7,122). The gross and net working capitals are positive. It indicates that the company is efficient in managing current assets, liability and the overall liquidity of the company (Horner, 2013).

Adjusting working capital

A lag in the values of merchandize inventory and receivables will reduce the value of gross working capital to $9,369 million. A lag in accounts payable will cause an increase in current liabilities to a total of $7,953 million. Thus, the resulting net working capital will amount to $1,416 million. The calculations are based on the assumption that inventory, receivables, and payables are evenly distributed throughout the year. The results show that change in the credit policy of the company can interfere with the estimated value of working capital. It may also affect the liquidity position of the company.

Financial ratios

The table presented below shows the basic financial ratios for the Best Buy Co. Inc. for the year 2015 and 2016.

	2016	2015
Liquidity ratios
Current assets	10516	9886
Current liabilities	7122	6925
Inventory	4864	5051
Current ratio	1.48	1.43
Quick ratio	0.79	0.70
Profitability ratios
Revenue	39,403	39528
Gross profit	9440	9191
Net profit	1228	897
Total assets	13,856	13519
Total equity	4709	4378
Gross profit margin	23.96%	23.25%
Net profit margin	3.12%	2.27%
Return on assets	8.86%	6.64%
Return on equity	26.08%	20.49%
Turnover ratios
Receivables	1,347	1,162
Inventory	4864	5051
Payable	4984	4450
Cost of goods sold	29,963	30334
Receivables turnover	29.25	34.02
Payable turnover	6.01	6.82
Inventory turnover	8.10	7.83
Total asset turnover	2.84	2.92
Leverage ratio
Total assets / equity ratio	2.94	3.09

Source of data – Best Buy Co. Inc., 2017

Four categories of ratios are shown in the table above. Under liquidity ratios, there was a small growth in the liquidity level. However, the values are low and it may indicate that the company is facing difficulties in settling immediate obligations. Secondly, the earnings of the company rose as indicated by the profitability ratios. Further, the turnover ratios show that the efficiency level got better. Finally, the leverage ratio indicates that a significant proportion of assets are financed by debt. This implies that the company is highly levered. A comparison of the values of the ratios shows that there was a slight improvement in the leverage level during the two year period. Thus, the ratio analysis above shows that the overall financial position of the company got better in 2016 (Clarke, 2012).

Capital budget

This section will focus on using the various investment appraisal techniques to evaluate the viability of the proposed project. The results of the calculations are summarized in the table below.

Year	Cash flow	Discount factor (11%)	Present values	Cumulative cash flow	Cumulative discounted cash flow
0	-1,000,000	1	-1,000,000	-1,000,000	-1,000,000
1	200,000	0.900900901	180,180.18	-800,000	-819,819.82
2	300,000	0.811622433	243,486.73	-500,000	-576,333.09
3	400,000	0.731191381	292,476.55	-100,000	-283,856.54
4	450,000	0.658730974	296,428.94	350,000	12,572.40
5	500,000	0.593451328	296,725.66	850,000	309,298.07
6	400,000	0.534640836	213,856.33	1,250,000	523,154.40
		Net present value	523,154.40
		Internal rate of return	19%
		Simple payback period	3.2
		Discounted payback period	3.6
		Accounting rate of return	37.50%
		Profitability index	1.52

Capital budgeting is a vital aspect in finance because it aids in evaluating capital investment projects before putting funds in such project. Capital investment projects are capital intensive and irreversible. Therefore, it is important to thoroughly evaluate such project (Carey, Knowles & Towers-Clark, 2014). In the table above, the net present value of the project amounts to $523,154.40. The value is positive and this implies that the project is profitable. Further, the estimated value of internal rate of return is 19%. The value is greater than the cost of capital and it implies that the project is profitable. The simple and discounted payback periods were 3.2 and 3.6 years respectively. The company will be able to recoup the initial investment before the lapse of the project period. The accounting rate of return was high at 37.50%. It indicates that the project is profitable. Finally, the profitability index is 1.52. The value is greater than 1 which implies that the project is profitable. The six capital budgeting techniques that are used above indicate that the project is viable. Therefore, the company can invest in the project (Wahlen, Baginski & Bradshaw, 2014).

Conclusion

The paper focused on carrying out financial analysis for Best Buy Co., Inc. and investment appraisal for a project that they intend to undertake. The company deals with the sale of consumer electronics. The analysis above shows that it has a positive working capital. This implies that the company is effective in managing working capital. Ratio analysis shows that the performance improved between the year 2015 and 2016. An evaluation of the proposed project shows that it is viable. Therefore, the company should invest in the project. Financial analysis is vital because it helps in understanding the performance. This benefits the various stakeholders’ of a company.

References

Best Buy Co. Inc. (2017). Financial information. Web.

Carey, M., Knowles, C., & Towers-Clark, J. (2014). Accounting: A smart approach. New York, NY: Oxford University Press.

Clarke, E. A. (2012). Accounting: An introduction to principles + practice. Boston, MA: South-Western Cengage Learning.

Horner, D. (2013). Accounting for non-accountants. New Delhi, India: Kogan Page Ltd.

Wahlen, J. M., Baginski, S. P., & Bradshaw, M. (2014). Financial reporting, financial statement analysis, and valuation: A strategic perspective. Boston, MA: South-Western Cengage Learning.

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