Part 1 - Background Information
Describe the company including:
Name and the name of its CEO/President
- The current CEO of Metro Inc. is Eric Richer La Flèche.
Address of the head office of the corporation
- The head office of Metro Inc. is located at 11011 Maurice-Duplessis Blvd., Montréal, Québec, Canada, H1C 1V6.
Areas of business activity
- Metro Inc. is a retailer, franchiser, and distributor that operates in food and pharmacy related activities.
Number of branches or production facilities
- Metro Inc. currently has 953 food stores under banners such as Metro, Metro Plus, Super C, and Food Basics. There are 648 drugstores primarily under the Brunet, Food Basics Pharmacy, Jean Coutu, and Metro Pharmacy banners.
TSX ticker symbol and name per stock quotations
- TSX Ticker Symbol: MRU
- Name per Stock Quotations: Metro Inc.
Length of time it has been in existence
- Metro Inc. has been in operation since December 22, 1947.
Fiscal period covered by the annual report
- Metro Inc.’s annual report covers the fiscal year ended September 26, 2020.
Who are the auditors? What did they conclude? (41-42) The auditors of Metro Inc.’s consolidated financial statements are Ernst & Young LLP. After conducting their audit following Canadian generally accepted auditing standards, they came to the conclusion that the financial statements presented in the annual report are a fair representation of the financial position of Metro Inc. and its subsidiaries as of September 26, 2020. All the accompanying consolidated financial statements are in accordance with International Financial Reporting Standards.
What are the company’s major sources of revenue?
Metro Inc. does not specify their major sources of revenue.
What valuation method was used for the corporation’s inventories? (54) Inventories are valued at the lower of cost and net realizable value. The warehouse inventories use the average cost valuation method.
Retail inventories valued at the retail price less the gross margin and certain considerations received from vendors.
What depreciation (depletion, amortization) method(s) did the company use? (31, 54, 55, 61)
- Right of use assets and interest expense on lease liabilities – Straight-line
- Compensation expense – Straight-line
- Buildings and equipment – Straight-line
- Leasehold improvements – Straight-line
- Lease payments – Straight-line
- Investment Properties – Straight-line
- Intangible Assets – Straight-line
- Operating leases and rental income – Straight-line
Did the company have a successful year according to the CEO? Explain. (7) According to the CEO, the company had a successful year. The beginning of 2020 saw a solid revenue growth. When lockdown occurred, their sales grew significantly. They were also able to achieve their objective related to the of acquisition of Jean Coutu Group. During the 2020 fiscal year, their net earnings were up $829.1 million (13.3%). The share price went up to $64.02, which was 10.6% larger than the previous year. The dividend policy increased from 20-30% to 30-40%. The dividend increased by 12.5% to $0.90 per share. The shareholder return was 12.3%. Finally, Flèche stated that their financial position remained “very solid” and that their balance sheet would enable future growth.
What is the “outlook” of the company as outlined by the CEO? (8) The outlook of the company is good. The pandemic accelerated the emergence of trends that position the company well within the perception of consumers. The consumer habits that are likely to change will be beneficial for the company. The pandemic allowed the company to show their resilience and ability to overcome challenges and leverage opportunities. Metro’s priorities for the 2021 fiscal year are: ensuring the safety of employees and customers, developing their banner, completing their pharmacy combination, continuing to modernize their supply chain, increasing e-commerce capacity, and continuing to develop talented employees.
Part 2 – Ratio & Trend Analysis
Vertical Analysis: Income Statement
From the vertical analysis of the income statement, it can be noted that the company remained relatively consistent in relation to the net sales. Although net sales were higher in 2020 than the previous fiscal period, operating expenses increased proportionally resulting in only a slight difference in the percentage figure. This increase in net sales was due to grocery sales increasing significantly after restaurant closures during lockdown. The increase in operating expenses was caused by an increase in wage and fringe benefits, as well as the employee benefits expense (63), most likely another effect of the pandemic. Metro Inc. also suffered a loss from disposing of a subsidiary, however, due to their increased sales this period, they still managed to earn an operating income that was 1.5% higher than the previous fiscal year. The company incurred higher depreciation costs relative to the net sales in 2020 due to amortization on right-of-use assets such as property, vehicles, and equipment (63, 68). However, Metro Inc.’s increase in revenue made up for these costs, resulting in their earnings before and after income taxes being comparable to the percentage relative to sales in 2019.
Vertical Analysis: Balance Sheet
From the vertical analysis of the balance sheet, it can be seen that the percentage of Metro Inc.’s current and capital assets are equivalent between the fiscal year of 2019 and 2020. It should be noted that the company did have a greater amount of both current and capital assets due to an increase in cash, accounts receivable, inventory, and the acquisition of right-of-use assets. Long-term liabilities, however, made up a larger portion of the total equity at 40.3% as a result of amassing more notes payable and lease liabilities (49, 75). This contributed to the total liabilities rising to 54.1%, an increase from 46.1% in the previous year. This, combined with the fact that common shares and retained earnings decreased, corresponded to the shareholder’s equity only making up 45.9% of the total liabilities and equity. This is a decrease from 53.9% in 2019. This demonstrates that Metro Inc. used a larger amount of debt than equity to finance its assets compared to the previous year, which is an indication of greater financial risk.
Horizontal Analysis: Income Statement
The sales in 2020 have seen a 7.3% increase compared to the previous year. The cost of sales and operating expenses have also gone up by 5.8%. This increase in sales with a lesser increase in cost of sales and operating expense has resulted in the operating income before depreciation and amortization and associate’s earnings to increase by 27.4%. The depreciation and amortization accounts have also seen a massive increase; they have changed by 61.5% compared to the previous fiscal period. The financial costs have also seen an increase of 31.8%. This has led to the earnings before income taxes to only increase by 11.9%. The income taxes increased by 13.0%. The company has seen an increase in sales with a lesser percentage of increase in the cost of sales and operating expenses. This has overall resulted in the net earnings to have increased by $82 million (11.5%) compared to the previous fiscal period.
Horizontal Analysis: Balance Sheet
Metro Inc’s current assets have increased by 19.7%. They also saw a 21.6% increase in their capital assets. This led to the total assets having increased 21.2% compared to the previous fiscal year. The current liabilities have gone down by 0.9%, but the long-term liabilities have increased by 67.6%. A large part of this increase was from lease liabilities which were not added in the previous fiscal period. The leases alone have increased the long-term liabilities by 44%. This has caused the total liabilities to increase by 42.4%, twice the increase that the total assets saw. The shareholders’ equity section had common shares, treasury shares, and non-controlling interests change by -1.1%, 2.0%, and -1.5% respectively. The contributed surplus has gone up by 15.6% and the retained earnings went up by 4.8%. These increases have resulted in the total shareholders’ equity increasing by 3.1%.
The current ratio for Metro Inc. in 2020 was 1.34:1, an increase from 1.11:1 in 2019. Although this is lower than the rule of thumb of 2:1, Metro Inc. is surpassing the industry average of 1.18:1. This indicates that while they may have some difficulties in meeting their short-term obligations and liabilities, they are performing better than other companies in the industry.
The working capital for Metro Inc. in 2020 was $640.40 million, a significant increase from its previous fiscal period which had a working capital of $210.70 million. This demonstrates that the company has the ability to fund its current activities and invest in future operations and projects. However, this drastic increase also indicates that the business may have excess inventory or cash that is not being utilized effectively. After referring to the annual report, it can be noted that Metro Inc. has a higher amount of current assets than the previous year, hence the increase in working capital. They have more cash, accounts receivable on subleases, and inventory than they did at the year ended 2019, which could have been used for more advantageous purposes such as restructuring or expansion.
The quick ratio for Metro Inc. in 2020 was 0.63:1, an increase from 0.47:1 in 2019. Although this is lower than the rule of thumb of 1:1, Metro Inc. has surpassed the industry average of 0.33:1. This indicates that they may have difficulties meeting short-term obligations immediately, though they are performing better compared to other companies in the industry.
The inventory turnover for Metro Inc. in 2020 was 12.0 times a year, a decrease from 12.1 in 2019. This means that it took approximately 30.4 days for the company to sell its inventory compared to 30.2 days in the previous year. Although this demonstrates how Metro Inc. has been performing consistently compared to its previous fiscal periods, this is lower than the industry average of turnover being 22.8 times per year. The company is risking keeping their inventory until it becomes unsellable and incurring steep warehouse costs. This is an indication of weak sales, poor marketing, or overstocking. However, it can be seen as beneficial during the COVID-19 pandemic when product shortages occur frequently.
The debt ratio for Metro Inc. in 2020 was 54.1%, an 8% increase compared to the previous year. This was caused by an increase in total liabilities due to the addition of lease liabilities. This shows that the company has a higher degree of leverage and has a greater portion of their assets funded by creditors. As a result, Metro Inc. may have a more difficult time borrowing money to finance its future expenditures. Creditors may not be as confident in their ability to pay them back when the debts are called in.
The equity ratio for Metro Inc. in 2020 was 45.9%, which is an 8% decrease compared to its previous fiscal year. This decrease is the result of the total assets increasing by 21.2% compared to the total shareholders’ equity increasing by 3.1%. A lower equity ratio indicates that the company has a higher degree of leverage and a lesser portion of it is being financed by its owners. Potential investors may be less inclined to invest since the risk of the business being unable to pay back its debts is higher.
The profit margin for Metro Inc. in 2020 was 4.4%. This is a 0.1% increase compared to its previous fiscal year. This is quite high compared to the industry average of 1.5%, as high-volume businesses tend to have low profit margins. This is a good sign as it demonstrates how Metro Inc. is capable of maintaining a consistent profit margin even during the COVID-19 pandemic, where companies may incur more costs due to the provision of PPE. It also shows that the company will be able to withstand increases in operating expenses or future periods of poor sales.
The return on assets for Metro Inc. in 2020 was 5.9%, a 0.6% decrease compared to the previous fiscal year. This is lower than the industry average of 6.80%. This is not a good sign because it indicates that the company’s management has not been as efficient utilizing the company’s assets to generate income. Investors may be deterred from investing after observing how the company is unable to effectively convert its investments into profit.
The return on equity for Metro Inc. in. 2020 was 12.9%, a 0.9% increase compared to the previous fiscal year. They have also surpassed the industry average of 12.1%. This is a positive sign for investors as it shows how the company is profitable with regard to shareholders’ equity.
The book value per share for Metro Inc. in 2020 was $24.65 per share, which is an increase of 5% compared to its previous fiscal year of $23.48. This can be credited to the slight increase in retained earnings in 2020. It cannot be compared to industry averages as it is calculated using historical costs rather than a metric that would reflect anticipated earnings.
The earnings per share for Metro Inc. in 2020 was $3.16 per share, a significant increase from the previous year of $2.80 per share. This resulted from an increase in net income and a decrease in common shares in 2020. A higher earnings per share indicates that the net income earned by each common share is higher as well, which is appealing to investors. Investors would be willing to pay more for Metro Inc.’s shares since the company is profitable in relation to its share price.
The price-earnings ratio for Metro Inc. in 2020 was 19.6, a decrease from the previous fiscal year of 20.4. However, this is still higher than the industry average of 11.15, which demonstrates how investors are expecting higher growth rates from Metro Inc. than the general market. They are willing to pay more per share in anticipation for their prospective success.
Part 3 - Conclusion
In this section, you will pull together all the information you gathered and analyzed in the first two sections. You will analyze the data you have collected:
- What is the corporations’ financial position and performance based on the results of your ratio and trend analysis? Substantiate your comments by referring to your numbers.
Based on the results of the ratio and trend analysis, we can conclude that the corporation’s financial position and performance have been strong. Metro Inc.’s current ratio, quick ratio, profit margin, return on equity, and price-earnings ratio have exceeded the industry average, and in some cases, have doubled it. The current ratio of 1.34:1 is an increase compared to the previous year and is better than the industry average. This puts the corporation in a better position to meet their short-term obligations and liabilities. The profit margin saw an increase of 0.1% and is substantially larger than the industry average. Metro Inc. was able to increase its profit margin even with the increase of expense caused by the COVID-19 pandemic. The company also has a large working capital, which provides them with the opportunity to invest in future operations and expand. This extra working capital may also be useful in the future to mediate and manage any unknown issues that may arise with the ongoing pandemic. The company has taken on leases, which has resulted in the debt ratio increasing and the equity ratio decreasing. However, the company’s quick ratio has also increased, and is an indication that they are more than capable of paying off their current liabilities compared to the previous fiscal year. The earnings per share have also increased substantially compared to the previous year. The horizontal analysis of the balance sheet shows that the total assets have increased by 21.2% and the total liabilities have increased by 42.4%. However, the shareholders’ equity still showed an increase of 3.1% with the extra liabilities. The horizontal analysis for the income statement shows that the sales have increased by 7.3% and that the cost of sales and operating expense have increased by 5.8%. This is good as Metro Inc. has seen a larger growth in sales with a lesser growth in cost of sales and operating expenses. The net earnings for the year also increased by 11.5%. Metro Inc. has shown growth in a time when many companies have been struggling to stay open. The growth of the company has put it in a strong financial position and the financial performance for the 2020 year has been excellent.
- In the final paragraph of your report, explain if you would invest in the corporation.
We would invest in Metro Inc. as the corporation has demonstrated its ability to adapt to the unforeseen circumstances that the COVID-19 pandemic has caused. From the horizontal and vertical analysis, it can be noted that the company has seen an 11.5% increase in its net earnings and has remained consistent in sales and operating expenses in comparison to the previous fiscal year. Although the company has not met the rule of thumb for a select few of the ratio analyses, they have surpassed the majority of the industry averages. Theory is not always what happens in practice and may not be an accurate reflection of a business’s performance as it encompasses a wide variety of industries. It does not take different business models and the fact that different industries will have different standards into consideration. Rather, comparing to the industry average will provide for a more meaningful insight into the company’s operations. For example, the industry average for the current and quick ratio are lower than the rule-of-thumb, demonstrating that many corporations are unable to meet the ideal ratio. However, if we compare Metro Inc.’s performance to its peers via the industry average, we can see that their performance is above average in areas such as the profit margin and return on equity. The fact that their earnings per share and price-earnings ratio is high is ideal, and an indication that the company is expected to grow and is profitable in relation to its share price. Furthermore, with the impact of COVID-19, many industries and corporations have been drastically impacted by the unprecedented landscape it has caused within the social and economic realms of society. However, Metro Inc. dominates in the food, and pharmaceutical industries which are all necessities, especially during quarantine and lockdown. Therefore, it can be expected that Metro Inc. will continue to thrive and expand where many other companies would fail. As such, after analyzing the performance of the business and looking at the general direction they are heading in, it is worthwhile to invest in Metro Inc.