The ratios presented on the Analysis for ROE with regards to Sears of 51.4% for 1996 and of 22% for 1997 are deceiving. Even though they are shown above the ones from Wal-Mart of 35.7 % for 1997 and 19.8 % for 1998 this doesn’t mean they have a healthier financial and more stable company than Wal-Mart. When we take apart the ROE number into its parts we can see a really high leverage from Sears.
Wal-Mart with just a few points below the ROE from Sears when analyzed seems more solid and stable. Lets remember that ROE comes from the profit margin, asset turn over and financial leverage. The combination of the performance of this 3 determines the ROE for the company. Now keeping this in mind we have Wal-Mart who accounts with a high turn over assets with 5.4 for 1997 and 2.8 for 1998, while Sears shows a 2.1 and 1.1 for 1996 and 1997 respectively, therefore we can translate this into a better inventory turn over which at the end of the day this means more sales, therefore more income. The turn over assets from Sears is not really good and this is understandable, because the products commercialized by Sears have higher cost, therefore this will not be products accessible for everyone. From just this perspective it seems that Wal-Mart has done a better job than Sears delivering its products to the consumer. therefore Wal-Mart seems to be going ahead.
Now lets review what happens with the profit margin. Sears has a profit margin of 5.2% for 1995, 3.3% for 1996 and 2.9% for 1997. Without further analysis this shows how this has decreased significantly over 3 periods and the loss is significantly. Now if the profit margin gives us a peak to how much a company earns for each sale we can see something is not going right with Sears. Wal-Mart on the other hand shows a 2.9% for 1996, 2.9% for 1997 and a 3.0% for 1998. This is a very slow increase but still reflects it has a good control on its prices with regards to its costs. The increase is just...
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