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End-of-level assessment · Judge a company
Judge a company: Dollar General's turnaround year
About 120 minutes. Work it as you would at work: on your own, with the material below, then judge your work against the criteria and compare it with a model answer. Pass mark: 75% with no criterion at 0.
General education, not financial advice.
The brief
This is an exercise in analysis on a real filing. It is not a recommendation to buy, sell or lend, and the figures will be out of date by the time you read this.
From: the chair of an investment committee. Due: in two hours.
Dollar General's net income rose by a third last year, after a difficult 2024. Before Thursday's meeting I need your own view, on two pages, from its annual report alone: how much of the improvement is real, whether the profit is backed by cash, how much of it the accounts flatter, and how safe its debt is once you count everything it owes. Tell me what would change your mind.
Your material. Dollar General Corporation's Form 10-K for the fiscal year ended 30 January 2026 (filed 20 March 2026), free on the SEC's EDGAR site: search "Dollar General", filing type 10-K. Use Item 7 (MD&A), Item 8 (the financial statements and notes) and Item 1A (risk factors). Nothing else.
No figures are given here. Finding the right ones, and noticing what sits behind them, is part of the test.
Your task
Write a memo of no more than two pages, in the box below, with:
- a headline sentence and a three-sentence summary, conclusion first;
- performance: what drove sales and margins, with the numbers, and what the company says caused them;
- cash: profit against operating cash flow and free cash flow, and what explains the gap;
- earnings quality: anything in either year that flatters or depresses the comparison, with its size;
- credit: debt and lease-adjusted leverage, cover, liquidity and ratings;
- what would change your view: three specific, measurable triggers.
Cite the source of every figure (statement or note). Give no buy, sell or lending recommendation: say what the analysis shows. Then work the reasoning check and score your memo.
Reasoning check
Worked numbers and judgement calls, marked as you go.
Work it through
From the 10-K: operating profit 2,203.7 million; depreciation and amortisation 1,046 million; operating lease cost 1,990 million; current portion of long-term obligations 14.4 million; long-term obligations 4,565.9 million; operating lease liabilities 1,532.5 million (current) and 9,605.9 million (long-term). Work out lease-adjusted leverage.
- 2,203.7 + 1,046 + 1,990
- 14.4 + 4,565.9 + 1,532.5 + 9,605.9
- 15,718.7 ÷ 5,239.7
- (2,203.7 + 1,990) ÷ (net interest 230.6 + 1,990)
Work it through
Net income 1,512.3 million; operating cash flow 3,634.5 million; purchases of property and equipment 1,241.2 million; dividends paid 519.5 million; total assets 31,132.7 million at the start of the year and 30,963.7 million at the end.
- 3,634.5 − 1,241.2
- 2,393.3 − 519.5
- (1,512.3 − 3,634.5) ÷ average assets 31,048.2 × 100
Quick quiz
Tap an answer to check it.
Operating profit rose 28.6%, from 1,714.1 million to 2,203.7 million. The 2024 figure includes 214.2 million of impairment charges from a store portfolio review. What is the best estimate of underlying growth, before any other adjustment?
- that adds the impairments to 2025 instead of 2024
- they belong in the record, but a one-off in the base year flatters the comparison
- there were no impairments of that size in 2025 to subtract
Show answer
About 14%: (2,203.7 ÷ (1,714.1 + 214.2)) − 1. The impairments depressed 2024, so adding them back to the base year gives the comparable growth.
Gross margin rose from 29.6% to 30.7%. The LIFO provision charged to cost of goods sold was 211.0 million in 2025 and 38.7 million in 2024. What does that do to your reading of the margin?
- it was much larger in 2025, so it held 2025 back
- under LIFO, rising costs flow into cost of goods sold through the provision
- margin rose even after a larger provision
Show answer
The underlying improvement was larger: excluding the provision, gross margin rose from about 29.7% to about 31.2%. A larger LIFO provision in 2025 depressed that year's gross margin; adjusting both years shows a bigger underlying gain.
Operating cash flow (3.6 billion) was well above net income (1.5 billion). Which explanation is most complete?
- nothing in the filing points to that; the gap is explained by named lines
- proceeds from asset sales are investing, not operating, cash flow
- the cash flow statement shows the gap coming from inventories, payables and depreciation, not customer prepayments
Show answer
Depreciation of about 1 billion, plus a release of working capital: inventories fell by about 0.4 billion while payables rose by about 0.2 billion, a release that can't repeat at that size every year. Follow the cash: name the lines that create the gap, then ask whether they recur.
Spot the error
One line is wrong. Tap it.
Which sentence of this draft memo would a reviewer flag first?
Show answer
Leverage is now a comfortable 1.4 times EBITDA, so lease commitments need not concern lenders.. 1.4× is debt alone. With 11.1 billion of operating lease liabilities and 2.0 billion of rent, lease-adjusted leverage is about 3.0× and fixed-charge cover about 1.9×: leases are the main fixed obligation.
Score your work
For each criterion, pick the description that matches what you wrote, not what you meant. Be strict: the model answer comes next.
Model answer
The figures (Form 10-K for the year to 30 January 2026; millions of dollars unless stated):
| Fiscal 2025 (to 30 Jan 2026) | Fiscal 2024 | Where | |
|---|---|---|---|
| Net sales | 42,724.4 | 40,612.3 | Income statement |
| Gross margin | 30.7% | 29.6% | Income statement |
| Operating profit | 2,203.7 | 1,714.1 | Income statement |
| Net income | 1,512.3 | 1,125.3 | Income statement |
| Depreciation and amortisation | 1,046.3 | 971.7 | Cash flow statement |
| Interest expense, net | 230.6 | 274.3 | Income statement |
| Operating lease cost | 1,990 | 1,890 | Leases note |
| Operating cash flow | 3,634.5 | 2,996.1 | Cash flow statement |
| Capital expenditure | 1,241.2 | 1,309.9 | Cash flow statement |
| Debt (current + long-term obligations) | 4,580.3 | 6,238.5 | Balance sheet; debt note |
| Operating lease liabilities | 11,138.4 | 11,224.9 | Balance sheet; leases note |
Basis: EBITDA = operating profit + depreciation and amortisation; EBITDAR adds operating lease cost (1,990; variable lease cost left out); lease-adjusted debt = debt + operating lease liabilities, at year end; fixed-charge cover = (operating profit + operating lease cost) ÷ (net interest + operating lease cost).
Dollar General: a real recovery, smaller than the headline, carried by cash released from stock · Source: Form 10-K, year to 30 January 2026
Summary. Operating profit rose 28.6% to 2.2 billion, but nearly half of that is the absence of 2024's 214 million of store impairments: excluding them, growth was about 14% (about 23% if the larger LIFO provision is also excluded). Operating cash flow of 3.6 billion, well above net income of 1.5 billion, was helped by a one-time release of inventory, and paid down 1.7 billion of debt. Counting leases, the company still carries about three times EBITDAR, and rent is its main fixed cost.
Performance. Sales rose 5.2%, with same-store sales up 3.0% (traffic +1.6%, average transaction +1.4%, according to the MD&A). Gross margin rose from 29.6% to 30.7%; the MD&A attributes it mainly to "lower shrink, higher inventory markups and lower inventory damages", partly offset by a LIFO provision of 211 million (39 million in 2024): excluding the provision, margin rose from about 29.7% to 31.2%. SG&A edged up to 25.5% of sales. ROE rose to about 19% from about 16%.
Cash. Free cash flow was about 2.4 billion (3,634.5 − 1,241.2) and 1.9 billion after dividends; there were no buybacks. Inventories fell about 0.4 billion (7% per store) and payables rose about 0.2 billion: a release of working capital that won't repeat at that size. Accruals were about −7% of assets.
Earnings quality. Both directions matter: 2024 was depressed by 214 million of store impairments, and 2025 by a larger LIFO provision (2025 had smaller impairments of its own, about 57 million). Excluding the 2024 impairments, operating profit grew about 14%; excluding the LIFO provision in both years as well, about 23%. Either way, the recovery is real but well short of the headline 29%.
Credit. Debt fell to 4.6 billion (1.4× EBITDA); with 11.1 billion of operating leases, lease-adjusted debt is about 15.7 billion, 3.0× EBITDAR (3.8× a year earlier). Fixed-charge cover is about 1.9× (1.7×). Liquidity: 1.1 billion of cash, an unsecured 2.375 billion revolving facility and a commercial paper programme of up to 2.0 billion. In 2025 Moody's lowered its rating from Baa2 to Baa3 with a stable outlook, and S&P moved its outlook from negative to stable: the lowest rung of investment grade, stabilising.
What would change my view: gross margin falling back below 30% as shrink rises again; inventory per store rising again without a matching rise in sales; lease-adjusted leverage moving back above 3.5×, for example through debt-funded buybacks.
Why this answer works
- It finds the two one-offs that pull in opposite directions and sizes both, instead of taking the 28.6% at face value.
- It follows the cash to named lines (inventories, payables, depreciation) and says what won't recur.
- It counts leases and rent in the same ratio, and uses fixed-charge cover, the ratio that matters most for a store chain.
- Every explanation that is the company's own is attributed to the MD&A.
What a reviewer would flag in a weaker answer
- "Profit up a third, so the turnaround is proven": the base year was depressed by impairments.
- "Cash confirms profit": the gap is mostly a one-time stock release.
- Leverage of 1.4× quoted without leases.
- Ratings stated without the direction (Moody's cut to Baa3 in 2025).
- A buy, sell or "safe to lend" conclusion.
A second opinion
Studyfern has no AI of its own. For feedback on your answer, copy this into an AI assistant you trust, with your answer pasted at the end.
You are a strict reviewer at an investment firm, marking a junior analyst's two-page memo on Dollar General's Form 10-K for the fiscal year ended 30 January 2026. Mark only what I wrote; do not be generous: if my memo does not clearly meet a higher description, give the lower score. THE TASK. From the 10-K alone, a memo with a conclusion-first summary, then performance, cash, earnings quality, credit (counting leases) and three measurable triggers that would change the view. No buy, sell or lending recommendation. KEY FACTS TO CHECK MY FIGURES AGAINST (millions of dollars, 2025 then 2024): net sales 42,724.4 and 40,612.3; gross margin 30.7% and 29.6%; same-store sales +3.0% (traffic +1.6%, average transaction +1.4%); LIFO provision 211.0 and 38.7; 2024 impairment charges of 214.2; operating profit 2,203.7 and 1,714.1; net interest 230.6 and 274.3; net income 1,512.3 and 1,125.3; depreciation and amortisation 1,046 and 972; operating cash flow 3,634 and 2,996; capital expenditure 1,241.2 and 1,309.9; dividends 519.5 and 519.0; no buybacks; inventories 6,331.9 and 6,711.2; payables 4,051.6 and 3,833.1; debt 4,580.3 and 6,238.5; operating lease liabilities 11,138.4 and 11,224.9; operating lease cost 1,990 and 1,890; cash 1,138.5; 2.375 billion unsecured revolving facility; commercial paper up to 2.0 billion; Moody's Baa2 to Baa3 with a stable outlook in 2025, S&P outlook negative to stable. THE RUBRIC (score each 0, 1 or 2): 1. Figures and sources. 0 = a wrong figure, unsourced figures, or a ratio mixing years or bases. 1 = right and mostly sourced, but one ratio on an inconsistent basis. 2 = every figure right and sourced, every ratio on a stated, consistent basis, years labelled. 2. Check the source and the base. 0 = one-offs missed. 1 = one found and sized, the opposite one missed. 2 = both found and sized (2024 impairments of 214 million depress the base; 2025's 211 million LIFO provision depresses 2025's margin), with underlying growth stated. 3. Follow the cash. 0 = no operating cash flow, or cash said to confirm profit without explanation. 1 = cash figures given, gap unexplained or wrongly explained. 2 = gap explained by named lines (inventories down, payables up, depreciation) and the one-time part of the working-capital release identified. 4. Credit with everything counted. 0 = debt alone, leases ignored. 1 = leases added, but cover, liquidity, the debt repaid or the rating actions (with direction) missing. 2 = lease-adjusted debt against EBITDAR, fixed-charge cover, debt repaid, liquidity sources and the 2025 rating actions, with a judgement. 5. Know what would change your mind. 0 = none or vague. 1 = given but not tied to the memo's weak points or not measurable. 2 = three measurable triggers following from the memo's own weak points, each with a level or direction. 6. Memo discipline. 0 = no conclusion, a recommendation, or well over two pages. 1 = conclusion buried, or the company's explanations stated as facts. 2 = conclusion first, short evidenced sections, the company's explanations attributed, no recommendation, within two pages. HOW TO MARK. For each criterion give the score and quote the exact words from my memo that justify it. List every figure of mine that differs from the key facts. Add the total out of 12 and say whether I pass (9 or more, and no criterion at 0). Then give at most three priority improvements, each with an example from my own memo. Do not rewrite my memo. MY MEMO: (paste it here)