Aldi Supermarket: Financial Analysis

Paper Info
Page count 7
Word count 2062
Read time 10 min
Topic Economics
Type Essay
Language 🇺🇸 US

Introduction

Aldi is a global supermarket chain that is based in Germany. Aldi is a short form of “Albrecht Discount”. It is one of the world’s largest retail chains operating in more than 8000 stores globally (Aldi par.1). Aldi was founded by Karl and Theo Albrecht’s brother in 1946. They had inherited a convenience store from their mother and created a chain of discount food shops. The two brothers came up with a new idea or subtracting up to three percent rebate at the point of sale. At that time, leading retail stores mostly owned by co-operatives required their clients to gather discount stamps and send them regularly so as to claim their cash (Aldi Group History par. 2).

Aldi first went global by opening a branch in Birmingham, United Kingdom. Currently, the supermarket chain owns more than 400 stores in the UK alone, which makes the UK its largest market (Aldi Group History par. 2). The majority of the products sold by this supermarket chain are own-branded labeled plus a few non-branded products. This system enables Aldi to stock a variety of products similar to other general supermarkets but in a limited space. The Albrecht brothers are the one who came up with the idea of keeping the size of their retail stores as small at the same time providing similar services as the general supermarkets (Aldi par.3).

The supermarket chain normally gives out special offers. These special offers are mainly on household goods, for instance, clothes, and electronics (Aldi par. 4). They also present genuinely discounted prices for over 1300 range of foodstuff owing to its cost-cutting strategies. Some of the cost-cutting strategies that enable it to offer deeply discounted prices include locating its stores in the city outskirts where the land is cheaper, setting up cheaper warehouses, employing a limited number of employees, furnishing the store to a bare minimum, and stocking privately-labeled goods (Aldi Group History par. 6).

Comparing Aldi with its main rivals

Aldi’s main rivals are Tesco, Sainsbury, and Morrison supermarkets. They are operating in the retail segment, have the same business and sell similar products. However, unlike Aldi, the other retail supermarket chains only focus on the quality of products and not prices. Last but not least, they have all come up with different channels of distribution to reach their target markets easily (Graiser and Scott 12).

Risk factors

Aldi confronts various risks as an aftereffect of its marketing techniques. These risks are attributed to both internal and external factors. The risks may negatively affect the company’s future advancement, for instance, global market share, overall status, and consumer allegiance. The UK market alone is dominated by five major retail chains that control nearly three-quarters of the retail market, hence a very stiff competition (Worthington and Brotton 12). So as to maintain its status in the global business, Aldi needs to be aware of the business sector patterns and customer tastes and inclinations. However, the company is at risk of not keeping up with the fashion trend when the changes are taking place at a faster rate. On the off chance that the organization can’t take after the emerging design patterns, it risks losing its market share (Worthington and Brotton 14). Similarly, the introduction of new products in order to maintain the existing clients and attract new customers can have a negative ramifications if the process is so hasty. Rapid introduction of a new product that does not fall under this category may bring confusion (Worthington and Brotton 16).

Analysis of Financial Statements

Financial analysis is a very significant aspect of case study analysis. In any case, the financial analysis reflects on the performance of the company in relation to its strategies and structure (Gorsky 66). Even though financial analysis is somehow complex, a great deal of the company’s financial position can be determined using ratio analysis (Poznanski, Sadownik and Gannitsos 1).

Profitability Ratios

These ratios show whether the company is making progress or going down. Profitability ratios include Net Profit Margin, Return on Total Assets (ROA) and Return on Stakeholders Equity (ROE). Profit margin= Net Income/Net Sales Revenue. On the other hand, Return on Total Assets (ROA) = Net Profit/ Total Assets, whereas Return of Stakeholders Equity (ROE) = Net Profit/Stakeholders Equity (Poznanski, Sadownik and Gannitsos 2).

Net Profit Margin (NPM)

Net profit margin shows the company’s level of profitability (Poznanski, Sadownik and Gannitsos 2). As you can see from the table below, Aldi Supermarket has a higher net income earned by every dollar of net sales compared to Tesco Group in the five-year period. The high-profit margin is attributed to its cost-cutting strategies and prompts a response to consumer demand, taste, and preference.

The year 2014 2013 2012 2011 2010
Profit Margin Percentage for Aldi Supermarket 21.9 19.3 16.1 14.8 21.6
The Year 2014 2013 2012 2011 2010
Profit Margin Percentage for Tesco Group 9.2 4.1 3.7 6.5 6.4

Earning per Share

Earnings per Share= Net Income/Average Number of Common Stock Outstanding Earnings per the Share

Year 2014 2013 2012 2011 2010
Earnings per Share for Aldi Supermarket 5.81 4.93 3.95 3.53 4.86
Year 2014 2013 2012 2011 2010
Earnings per Share for Tesco Group 0.21 0.33 0.42 0.31 0.25

EPS shows the efficiency of earnings from each share. Earnings per share for Aldi Supermarket have been relatively low since 2010. It may be because of changes in the global market environment and some economic factors, rather than the poor performance of the company. However, its values are comparatively higher than Tesco Group’s, but this cannot be compared directly. This is because the prices of shares always vary from one company to another. In addition, the company has managed to improve its earnings per share by reducing the number of shares by buying them back from the stockholders.

Return on Equity (ROE)

The ratio computes the earning from every unit of equity. It is more reliable than earnings per share when comparing the performance of different companies. ROE for Aldi is better than Tesco PLC as a result of higher profit margins and increased revenue. Besides profit margin, the company puts more focus on the distribution of idle cash, enhancement of asset turnover and decreasing tax burden.

Year 2014 2013 2012 2011 2010
ROE% for Aldi Supermarket 30.23 29.78 26.28 25.29 25.67
Year 2014 2013 2012 2011 2010
ROE% for Tesco Group -52.7 6.2 0.72 10.6 16.9

Return on Assets (ROA)

Return on Assets ratio of any establishment shows how proficient assets are used to generate returns. ROA for Aldi is also higher than Tesco PLC as a result of increased account receivables and a decrease in bad debts.

Year 2014 2013 2012 2011 2010
ROA% for Aldi Supermarket 12.4 10.8 9.2 8.9 13.5
Year 2014 2013 2012 2011 2010
ROA% for Tesco PLC -12.7 1.94 0.25 5.7 5.0

Return on capital employed

This is a ratio that gauges the company’s level of efficiency in term of capital utilization. It is a good indicator since it considers debts and liabilities, unlike ROE which is only concerned with profits.

Year 2014 2013 2012 2011 2010
ROCE for Aldi supermarket 16% 12.2% 8.4% 7.7% 17.3%
ROCE for Tesco PLC 12.0% 11.80% 14.98% 14.42% 13.06%

ROCE for Aldi supermarket has been fluctuating over the five-year period. Its level of profitability was lower compared to its rival. However, Aldi is considered more efficient in the utilization of capital to generate revenue.

Liquidity Test

These ratios measure the ability of the company to meet its short-term obligations.

Current Ratio

Current ratio=Current assets/Current liabilities and it should be more than one. However, a high current ratio, particularly the current ratio larger than 2 may mean the company is using its resources unproductively.

Year 2014 2013 2012 2011 2010
Current Ratio for Aldi Supermarket 2.361 2.197 1.901 2.381 2.050
Year 2014 2013 2012 2011 2010
Current Ratio for Tesco PLC 1.01 1.18 0.67 0.68 0.74

The current ratios for Aldi Supermarket are above 0.1 in the last 5 years, which means the company is able to pay off the current debt. This is good financially. However, the current ratio larger than 2 may mean the company is using its resources unproductively. On the other hand, Tesco PLC has a relatively low current ratio. The ratios are below 0.1 at one point, which is financially unsound. But, the ratios have been improving in the last two years. The two companies can further improve their current ratio by taking the following into consideration: first, re-amortizing long-term loans; second, minimizing personal draws; lastly, selling off non-profitable or worthless assets.

Quick Ratio (Acid Test)

Quick Ratio= Quick Asset/ Current Asset

Actual Calculations= (Cash Equivalent Investment Securities+ Account Receivable)/ Total Current Liabilities

Year 2014 2013 2012 2011 2010
Acid Test for Aldi 2.01 2.01 1.76 2.12 1.99
Acid Test for Tesco PLC 0.8 0.84 0.48 0.5 0.56

The acid test ratio shows two companies real liquidity position. It is a more reliable ratio than the current ratio as it considers a quick asset and excludes inventory, which may not be converted to cash. There is an increase in the ratio (except in 2012), which means the company is in a good position and is increasingly growing compared to its main competitor.

Gearing ratio

Year 2014 2013 2012 2011 2010
Gearing ratio for Aldi 0.188 0.101 0.125 11.02 0.498
Gearing ratio for Tesco PLC 148.7 152.70 53.13 52.30 71.62

This ratio shows the company’s total level of indebtedness. The gearing ratio for Aldi has been fluctuating from one year to another. Nonetheless, the company has a low debt obligation than its competitor.

Solvency test

Debt-to-Equity Ratio

Debt-to-Equity Ratio= Total Liabilities/ Stakeholders’ Equity

Actual Calculations= Total Liabilities/ Total Shareholders’ Equity

Year 2014 2013 2012 2011 2010
Debt-to-Equity ratio for Aldi Supermarket 0.0931 0.864 0.872 0.991 0.818

A low ratio suggests that Aldi supermarket does not depend heavily on funds provided by creditors, which puts the business at less high risk.

Interest Coverage Ratio

This ratio is used to establish a company’s capability to pay interest on the unsettled balance. In other words, it gauges the company’s safety margin as regards interest payment within a given time. When a company has a low-interest coverage ratio, then it has a high debt burden. Therefore, a company with an interest coverage ratio of less than 1.5 has high leverage.

Interest coverage ratio= EBIT/Interest expense

Year 2014 2013 2012 2011 2010
Interest Coverage ratio for Aldi Supermarket 15.93 16.62 18.27 15.9
Interest Coverage ratio for Tesco PLC 4.25 4.76 7.88 6.35 5.29

The company is less leveraged compared to its rival, which implies less risk for lenders. This gives them an assurance that their interest will be paid back.

Limitations

The ratio analysis is a very significant tool for assessing the performance of companies as they mirror progress and viability. However, these ratios do not provide an ideal representation of a company’s financial position for a given time. In other words, financial ratios are not the best tool for analyzing a company’s financial position for any fiscal year. This is because these ratios rely on financial statements that are availed by companies through their annual reports, which are always summaries for a given time period. Therefore, ratio analysis should be carried out at intervals throughout the financial year to reflect the true picture of the company. In addition, ratio analysis always ignores the most significant aspects that play a key role in the interpretation of a company’s financial position, that is, the non-financial factors. This makes it very hard to conduct a perfect analysis.

Conclusion

From the above analysis, it is evident that Aldi supermarket is performing well compared to its main rival and, therefore, it is rational to invest in the company. The analysis shows that the company is stable and healthy financially. The profit margin shows that the profitability of Aldi supermarket keeps on increasing. The Earnings per Share and Return on Equity are also growing. The current ratio further suggests the company is able to pay off current liabilities. The quality of cash is good, which means that there is enough cash for running the business, especially when money is needed for emergency purposes. The debt-to-equity ratio also shows that the company does not rely too much on creditors, which is a healthy condition for any business. In a nutshell, investing in Aldi supermarket is not a risky venture.

Works Cited

Aldi. Welcome to Aldi. 2016. Web.

Aldi Group History. Company History.2016. Web.

Gorsky, Alex. Company Analysis, Cincinnati, Ohio Print: J & J Inc., 2014. Print.

Graiser, Andy and Taylor Scott. ”Understanding the Dynamics of the Supermarket Sector.” The Secured Lender 60.6. (2004): 10-14. Print.

Poznanski, Julie, Bryn Sadownik and Irene Gannitsos. Financial Ratio Analysis. 2013. PDF file. Web.

Worthington, Ian and Chris Brotton. The Business Environment, London: FT/Prentice Hall, 2009. Print.

Appendices

Appendix 1: Aldi Supermarket’s Balance Sheet

Aldi Supermarket’s Balance Sheet.

Years 2010 2011 2012 2013 2014
Cash & Short Term Investments 27.66M 32.26M 21.09M 29.21M 33.09M
Cash 19.36M 24.54M 14.91M 20.93M 14.52M
Short-Term Investments 8.3M 7.72M 6.18M 8.28M 18.57M
Total Accounts Receivable 9.77M 10.58M 11.31M 11.71M 10.99M
Accounts Receivables, Net 9.77M 10.58M 11.31M 11.71M 10.99M
Accounts Receivables, Gross 10.11M 10.94M 11.78M 12.05M 11.26M
Bad DeBt/Doubtful Accounts (340M) (361M) (466M) (333M) (275M)
Other Receivables 0 0 0 0 0
Inventories 5.38M 6.29M 7.5M 7.88M 8.18M
Finished Goods 2.85M 3.44M 3.82M 4.04M 4.51M
Work in Progress 1.46M 1.64M 2.26M 2.61M 2.46M
Raw Materials 1.07M 1.21M 1.42M 1.22M 1.21M
Progress Payments & Other
Other Current Assets 4.5M 5.19M 6.22M 7.61M 7.05M
Miscellaneous Current Assets 4.5M 5.19M 6.22M 7.61M 7.05M
Total Current Assets 47.31M 54.32M 46.12M 56.41M 59.31M
Net Property, Plant & Equipment 14.55M 14.74M 16.1M 16.71M 16.13M
Property, Plant & Equipment – Gross 30.43M 31.83M 34.65M 37.13M 36.69M
Buildings 9.08M 9.39M 10.05M 10.42M 10.05M
Land & Improvements 738M 754M 793M 885M 833M
Computer Software and Equipment
Other Property, Plant & Equipment
Accumulated Depreciation 15.87M 17.09M 18.56M 20.42M 20.56M
Total Investments and Advances 0 0 0 0 0
Other Long-Term Investments 0 0 0 0 0
Long-Term Note Receivables 0 0 0 0 0
Intangible Assets 32.01M 34.28M 51.18M 50.75M 49.05M
Net Goodwill 15.29M 16.14M 22.42M 22.8M 21.83M
Net Other Intangible’s 16.72M 18.14M 28.75M 27.95M 27.22M
Other Assets 3.94M 3.77M 3.42M 4.95M 3.23M
Tangible Other Assets 3.33M 3.52M 3.22M 2.59M 3.23M
Total Assets 102.91M 113.64M 121.35M 132.68M 131.12M
Liabilities’ & Shareholders’ Equity
Years 2010 2011 2012 2013 2014
ST Debt & Current Portion LT Debt 7.62M 6.66M 4.68M 4.85M 3.64M
Short Term Debt 7.6M 6.04M 3.16M 3.08M 3.63M
Current Portion of Long Term Debt 13M 616M 1.51M 1.77M 7M
Accounts Payable 5.62M 5.73M 5.83M 6.27M 7.63M
Income Tax Payable 578M 854M 1.06M 770M 500M
Other Current Liabilities’ 9.25M 9.57M 12.69M 13.79M 13.31M
Dividends Payable
Accrued Payroll 2.64M 2.33M 2.42M 2.79M 2.75M
Miscellaneous Current Liabilities’ 6.61M 7.25M 10.27M 10.99M 10.56M
Total Current Liabilities’ 23.07M 22.81M 24.26M 25.68M 25.09M
Long-Term Debt 9.16M 12.97M 11.49M 13.33M 15.12M
Long-Term Debt excl. Capitalized Leases 9.16M 12.97M 11.49M 13.33M 15.12M
Non-Convertibles Debt 9.16M 12.97M 11.49M 13.33M 15.12M
Convertibles Debt 0 0 0 0 0
Capitalized Lease Obligations 0 0 0 0 0
Provision for Risks & Charges 6.09M 8.35M 9.08M 7.78M 9.97M
Deferred Taxes (3.65M) (4.74M) (1.41M) 117M (242M)
Deferred Taxes – Credit 1.45M 1.8M 3.14M 3.99M 3.15M
Deferred Taxes – Demit 5.1M 6.54M 4.54M 3.87M 3.4M
Other Liabilities’ 6.57M 10.63M 8.55M 7.85M 8.03M
Other Liabilities’ (excl. Deferred Income) 6.57M 10.63M 8.55M 7.85M 8.03M
Deferred Income
Total Liabilities’ 46.33M 56.56M 56.52M 58.63M 61.37M
Non-Equity Reserves 0 0 0 0 0
Preferred Stock (Carrying Value) 0 0 0 0 0
Redeemable Preferred Stock 0 0 0 0 0
Non-Redeemable Preferred Stock 0 0 0 0 0
Common Equity (Total) 56.58M 57.08M 64.83M 74.05M 69.75M
Common Stock Par/Carry Value 3.12M 3.12M 3.12M 3.12M 3.12M
Retained Earnings 77.77M 81.25M 85.99M 89.49M 97.25M
ESOP Debt Guarantee 0 0 0 0 0
Cumulative Translation Adjustment/Unrealized For. Exch. Gain (869M) (1.69M) (288M) 43M (4.66M)
Unrealized Gain/Loss Marketable Securities 24M 448M 195M 106M 257M
Revaluation Reserves 0 0 0 0 0
Treasury Stock (20.78M) (21.66M) (18.48M) (15.7M) (19.89M)
Total Shareholders’ Equity 56.58M 57.08M 64.83M 74.05M 69.75M
Accumulated Minority Interest 0 0 0 0 0
Total Equity 56.58M 57.08M 64.83M 74.05M 69.75M
Liabilities’ & Shareholders’ Equity 102.91M 113.64M 121.35M 132.68M 131.12M

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Reference

EssaysInCollege. (2022, May 23). Aldi Supermarket: Financial Analysis. Retrieved from https://essaysincollege.com/aldi-supermarket-financial-analysis/

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EssaysInCollege. 2022. "Aldi Supermarket: Financial Analysis." May 23, 2022. https://essaysincollege.com/aldi-supermarket-financial-analysis/.

1. EssaysInCollege. "Aldi Supermarket: Financial Analysis." May 23, 2022. https://essaysincollege.com/aldi-supermarket-financial-analysis/.


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EssaysInCollege. 2022. "Aldi Supermarket: Financial Analysis." May 23, 2022. https://essaysincollege.com/aldi-supermarket-financial-analysis/.

1. EssaysInCollege. "Aldi Supermarket: Financial Analysis." May 23, 2022. https://essaysincollege.com/aldi-supermarket-financial-analysis/.


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EssaysInCollege. "Aldi Supermarket: Financial Analysis." May 23, 2022. https://essaysincollege.com/aldi-supermarket-financial-analysis/.