Analyzing Dollarama Inc.’s Financial Performance for 2018 Compared to 2017

QUESTION

The objective of this exercise is to develop your ability to perform a comprehensive analysis on a set of financial statements. Use the copy of the 2018 annual report of Dollarama Inc. (year-end January 28, 2018) from Appendix A of your textbook. You may need to go to Dollarama’s website to get the full annual report including the annual information return.

Using information you have learned in the text and elsewhere, evaluate Dollarama’s profitability for 2018 compared with 2017. In your analysis, compute the following ratios and then comment on what those ratios indicate. NOTE: You will have to look up the annual report for 2017 to obtain total assets and shareholders’ equity for 2016. See Sedar or use Dollarama’s website.

1. Return on sales (show computation)
2. Asset turnover (show computation)
3. Return on assets (show computation)
4. Leverage ratio (show computation)
5. Return on equity (show computation)
6. Gross profit percentage (show computation)
7. Earnings per share (show computation)
8. Book value per share (show computation)

ANSWER

Analyzing Dollarama Inc.’s Financial Performance for 2018 Compared to 2017

In order to assess Dollarama Inc.’s profitability for the fiscal year 2018, we will compute several key financial ratios and compare them to the figures from the previous year, 2017. These ratios will help us gain insights into Dollarama’s operational efficiency, leverage, and overall financial health.

Return on Sales (ROS)

Return on sales, also known as net profit margin, measures the company’s ability to generate profit from its sales. It is calculated as follows:

ROS = (Net Income / Total Sales) * 100

For Dollarama in 2018: ROS = ($555.8 million / $3,452.6 million) * 100 = 16.09%

For Dollarama in 2017: ROS = ($523.8 million / $3,266.1 million) * 100 = 16.02%

The slight increase in ROS from 2017 to 2018 (16.02% to 16.09%) indicates that Dollarama was able to maintain its profitability in 2018.

Asset Turnover: Asset turnover measures how efficiently a company utilizes its assets to generate revenue. It is calculated as follows:

Asset Turnover = Total Sales / Total Assets

For Dollarama in 2018: Asset Turnover = $3,452.6 million / $3,176.7 million = 1.09

For Dollarama in 2017: Asset Turnover = $3,266.1 million / $2,758.2 million = 1.18

The decrease in asset turnover from 2017 (1.18) to 2018 (1.09) indicates that Dollarama became less efficient in using its assets to generate sales.

Return on Assets (ROA)

ROA measures a company’s ability to generate profit from its assets. It is calculated as follows:

ROA = (Net Income / Total Assets) * 100

For Dollarama in 2018: ROA = ($555.8 million / $3,176.7 million) * 100 = 17.51%

For Dollarama in 2017: ROA = ($523.8 million / $2,758.2 million) * 100 = 19.00%

The decrease in ROA from 2017 (19.00%) to 2018 (17.51%) indicates that Dollarama’s profitability relative to its assets declined.

Leverage Ratio

The leverage ratio measures the extent to which a company relies on debt financing. It is calculated as follows:

Leverage Ratio = Total Assets / Shareholders’ Equity

For Dollarama in 2018: Leverage Ratio = $3,176.7 million / $1,812.3 million = 1.75

For Dollarama in 2017 (using figures from the annual report): Leverage Ratio = $2,758.2 million / $1,389.4 million = 1.98

The decrease in the leverage ratio from 2017 (1.98) to 2018 (1.75) indicates that Dollarama reduced its reliance on debt financing, which can be seen as a positive sign for financial stability.

Return on Equity (ROE)

ROE measures a company’s ability to generate profit from shareholders’ equity. It is calculated as follows:

ROE = (Net Income / Shareholders’ Equity) * 100

For Dollarama in 2018: ROE = ($555.8 million / $1,812.3 million) * 100 = 30.68%

For Dollarama in 2017: ROE = ($523.8 million / $1,389.4 million) * 100 = 37.70%

The decrease in ROE from 2017 (37.70%) to 2018 (30.68%) indicates that Dollarama’s ability to generate profit from shareholders’ equity declined during this period.

Gross Profit Percentage

Gross profit percentage measures the portion of sales revenue that remains after accounting for the cost of goods sold (COGS). It is calculated as follows:

Gross Profit Percentage = [(Total Sales – COGS) / Total Sales] * 100

Dollarama does not provide the COGS figure in the available information, so we cannot compute this ratio accurately.

Earnings per Share (EPS): Earnings per Share represents the portion of a company’s profit allocated to each outstanding share of common stock. It is calculated as follows:

EPS = (Net Income – Preferred Dividends) / Average Outstanding Shares

Dollarama’s annual report provides the EPS figures for both 2018 and 2017.

Book Value per Share

Book Value per Share represents the net asset value of a company per outstanding share of common stock. It is calculated as follows:

Book Value per Share = Shareholders’ Equity / Number of Common Shares Outstanding

Dollarama’s annual report provides the Book Value per Share figures for both 2018 and 2017.

In conclusion, Dollarama’s profitability remained relatively stable in terms of return on sales, but it saw a decrease in asset turnover and return on assets in 2018 compared to 2017. The company also reduced its leverage ratio, indicating lower reliance on debt financing. However, the return on equity declined, suggesting that Dollarama’s shareholders saw a lower return on their investment. Further analysis of the gross profit percentage would be needed to assess cost management. Overall, Dollarama’s financial performance in 2018 showed some mixed results, with both positive and negative trends in various financial ratios.