What ratios are most important in assessing current and predicting future value creation for Sears? For Wal-Mart?In order to assess the current performance of the firm, investors can do time series comparison to compare its progress throughout the years, and also do cross-sectional comparison to compare to competitors to know where it stands in the industry. Profit margins and turnover ratios generally have an inverse relationship to one another.

Differentiators – high margins low turnoverCost Leaders – high turnover low margins

Sears

Profitability RatiosGross Profit Margin = (Sales – COGS) / SalesTo analyse the effectiveness of Sears’ differentiation strategy in charging a higher markup to customers. Changes in this ratio might reflect changes in strategy or changes in profitability. (Analyse turnover ratios to determine effect)

EBITDA Margin = (Sales – COGS – R&D Expense – SG&A Expense) / SalesThis ratio takes other key costs. Does Sear’s incur high marketing (SG&A) expenses in order to sell its products? This ratio might be high for Sears since PPE comprises roughly of 29% of the firm’s assets (and this does not include operating leases). In order to analyse the effect of depreciation, we look at the EBIT Margin

EBIT Margin = (Sales – COGS – R&D Expense – SG&A Expense – Depreciation Expense) / SalesThis ratio should not have much year to year variations after taking into account the increase or decrease in sales, since R&D and SG&A Expenses do not vary with the amount of sales generated. An abnormal ratio suggests that we look further into the firm’s financial statements in order to determine its cause.

Net Profit MarginFinally we take into account the net profit margin which indicates how much of each dollar of sales is left over after all expenses are paid. Due to a focused differentiation strategy, Sears relies highly on its profit margins in order to generate earnings