# Week 6 Disc Questions

This paper performs vertical and horizontal analyses of ULTA BEAUTY, INC. balance sheet and income statement for Q1 and Q2, 2022 (EDGAR, 2022).

Balance Sheet

Horizontal Analysis

(All values are in thousands \$)

Horizontal Analysis

(All values are in thousands \$)

Income Statement

Vertical Analysis

(All values are in thousands \$)

Horizontal Analysis

(All values are in thousands \$)

Liquidity Analysis

1. Current Ratio

Current Ratio = (Current Assets/Current Liabilities)

Q1 2022: Current ratio = 2,531,867 / 1,599,747 = 1.58

Q2 2022: Current ratio = 2,442,913 / 1,502,054 = 1.63

In both Quarter 1 and 2 of 2022, the company’s current ratio was below 2, which indicates that the firm does not have sufficient assets to cover the short-term obligations. It is growing its sales faster than it can finance them which pose a high risk of insolvency. However, there has been some notable improvement because the current ratio for quarter 2 increased by 0.5 compared to quarter 1, 2022.

• Quick Ratio

Quick Ratio = (Current Assets – Inventory – Prepaid Expenses) / (Current Liabilities)

Q1 2022: (2,531,867 – 1,570,552 – 114,075) / 1,599,747 = 0.53

Q2 2022: (2,442,913- 1,666,130 – 123,014 – 39,029) / 1,502,054 = 0.41

Overall, the company’s quick ratio in the last two quarters is below 1, which indicates that it may not be able to pay off its current obligations using only quick assets. In quarter 2, the quick ratio declined, hence the need for the management to remedy the situation before it affects the firm’s financial performance in the long run.

• Cash Ratio

Cash Ratio = (Cash + Cash Equivalents/Current Liabilities)

Q1 2022: 654,486 / 1,599,747 = 0.41:1

Q2 2022: 434,226 / 1,502,054 = 0.29:1

The company has a ratio under 0.5 which is considered risky as the entity has twice as much short-term debt compared to cash. The ratio has decreased tremendously over the last quarter.

Solvency Analysis

Debt-to-Assets Ratio

Total liabilities / total assets

Q1 2022: 3,266,416 / 5,012,036 = 65.17%

Q2 2022: 3,176,926 / 4,945,994 = 64.23%

For Q1, 65.17% of the firm was financed by debt while 34.83% of the firm’s assets were financed by the investors.   This changed in quarter 2, with only 64.23% of the firm financed by debt and 35.77% of the firm’s assets were financed by investors. This was a slight improvement in the firm’s financial health over the last two quarters.

Interest Coverage Ratio

Interest Coverage Ratio = EBITDA / Interest Expense

Q1 2022: \$437.7 M / \$401 T = 1,091.5x

Q2 2022: \$391.4 M / -\$108 T = −3,624.3x

Equity Ratio

Total Equity / Total Assets

Q1 2022: 1,745,620 / 5,012,036 = .34

Q2 2022: 1,769,068 / 4,945,994 = .35

This firm is a leveraged company because the ratio is less than .5. Investors prefer to lend to firms with a higher equity ratio and not the leveraged companies.

References

EDGAR. (2022). Ulta Beauty, Inc. Sec.gov. https://www.sec.gov/edgar/browse/?CIK=1403568&owner=exclude

The following is the solvency and profitability analysis of Ulta’s company using its quarterly financial statements (EDGAR, 2022).

Solvency Analysis

1. Debt-to-Assets Ratio

Total liabilities / total assets

Q1 2022: 3,266,416 / 5,012,036 = 65.17%

Q2 2022: 3,176,926 / 4,945,994 = 64.23%

For Q1, 65.17% of the firm was financed by debt while 34.83% of the firm’s assets were financed by the investors, which improved in the following quarter indicating a better financial health in quarter 2, 2022.

• Interest Coverage Ratio

Interest Coverage Ratio = EBITDA / Interest Expense

Q1 2022: 437,708 / 401 = 1,091.5x

Q2 2022: 391,428 / (108) = −3,624.3x

The firm is more poised to pay its debts.

• Equity Ratio

Total Equity / Total Assets

Q1 2022: 1,745,620 / 5,012,036 = .34

Q2 2022: 1,769,068 / 4,945,994 = .35

This firm is considered a leveraged company and investors would not freely lend money to the company compared to firms with a ratio above .5.

Profitability Analysis

1. Gross Profit Margin

Gross profit margin = (total sales – cost of goods sold) ÷ total sales

Q1 2022: 941,026 / 2,345,901 = 40%

Q2 2022: 928,164 / 2,297,113 = 40%

The gross profit margin for both quarters is equal, but still less than an acceptable range of 50 to 70%. For this reason, the firm, for every dollar generated, \$0.6 would go into the cost of goods sold, while the remaining \$0.6 could be used to pay back expenses, taxes, etc. This is not a healthy position financially.

• Operating Profit Margin

Operating profit margin = operating profit ÷ revenue

Q1 2022: 437,708 / 2,345,901 = 18.66%

Q2 2022: 391,428 / 2,297,113 = 17.04%

The firm had high quality of earnings in quarter 1 compared to quarter 2. The firm should focus on ways to reduce operating costs.

• Net Profit Margin

Net profit margin = net income ÷ revenue

Q1 2022: 331,395 / 2,345,901 = 14.13%

Q2 2022:  295,677 / 2,297,113 = 12.87%

For quarter 2, for every \$1 of revenue, the company earns \$0.13 in net profit. This is a decline from the previous net profit margin of 14%.

References

EDGAR. (2022). Ulta Beauty, Inc. Sec.gov. https://www.sec.gov/edgar/browse/?CIK=1403568&owner=exclude 