How to use accounting numbers to assess strategy
This case explores how to use accounting numbers to assess strategy, business models, and risk for a
jeweler company. Address the following questions:
1. Consider the business model of Signet, Tiffany’s, and Blue Nile. How are the business models
reflected in the financial statements of each company? Use financial ratio analysis to identify the
business model difference.
2. In your assessment, which of the three companies is performing better and why?
3. What risks and opportunities does in-house customer financing create for Signet? How can we
identify and assess the extent of this risk using financial statement information?
4. How do you assess the performance of Signet’s in-house financing program?
5. Do you agree with Cohodes’s critique of Signet’s financing risk and its financial reporting of the
risk?
Sample Solution
Analyzing Jewelry Companies through Financial Statements
This case examines how financial statements can reveal insights into business models, risk, and performance for Signet, Tiffany's, and Blue Nile.
1. Business Model Differences in Financial Statements:
Signet:
- Business Model:Â High-volume, low-margin retail model with a focus on credit sales.
- Financial Statement Indicators:
- Lower gross margins compared to Tiffany's and Blue Nile due to higher discounts and promotions.
- Higher inventory turnover ratio due to faster sales velocity.
- Higher debt-to-equity ratio due to reliance on credit sales.
- Lower return on equity (ROE) due to lower margins and higher financing costs.
Full Answer Section
Tiffany's:- Business Model:Luxury retail model with a focus on high margins and brand prestige.
- Financial Statement Indicators:
- Higher gross margins compared to Signet and Blue Nile due to premium pricing.
- Lower inventory turnover ratio due to focus on exclusivity and limited-edition items.
- Lower debt-to-equity ratio due to stronger cash flow generation.
- Higher ROE due to higher margins and efficient use of equity.
- Business Model:Online jewelry retailer with a focus on competitive pricing and convenience.
- Financial Statement Indicators:
- Gross margins potentially lower than Tiffany's but higher than Signet due to online efficiency and bypassing physical store overhead.
- Inventory turnover ratio potentially falls between Signet and Tiffany's depending on their online sales strategy.
- Debt-to-equity ratio may vary depending on their financing strategy.
- ROE analysis requires further data to compare against Signet and Tiffany's.
- Performance Assessment:
- Profitability ratios:Net profit margin, return on assets (ROA)
- Liquidity ratios:Current ratio, quick ratio
- Efficiency ratios:Inventory turnover ratio, receivables turnover ratio
- Solvency ratios:Debt-to-equity ratio, interest coverage ratio
- Trend analysis:Looking at historical trends of these ratios
- Risks and Opportunities of In-House Financing (Signet):
- Default Risk:Customers may fail to repay loans, leading to bad debt and losses.
- Concentration Risk:Overdependence on credit sales can be risky if consumer spending weakens.
- Regulatory Risk:Changes in lending regulations could impact Signet's financing program.
- Allowance for Doubtful Accounts:This account reflects the estimated amount of uncollectible receivables. A rising allowance might indicate increasing default risk.
- Debt Service Coverage Ratio:Measures a company's ability to meet its debt obligations. A declining ratio could signal potential for financial stress.
- Assessing Signet's Financing Program Performance:
- Loan Delinquency Rate:Percentage of loans past due on repayments.
- Loss Rate:Percentage of loans written off as uncollectible.
- Profitability of Financing Program:Compare interest income generated from loans with the associated costs and risks.
- Cohodes's Critique:
- Analyze the terms of Signet's credit offerings, including interest rates and loan durations.
- Assess the economic climate and potential impact on consumer spending.