Interpreting Financial Results
FIN/571
January 25, 2016
Gurpreet Atwal
Interpreting Financial Results
This paper will interpret the financial statements from the past three years for Ascena Retail Group Inc (NASDAQ: ASNA). The paper will highlight four financial ratios including: the current ratio, the debt-to-equity ratio, the quick ratio, and the return on equity ratio. The financial statements that will be reviewed are from 2011 to 2014. Each ratio will be compared to the industry benchmarks to see where the company stands within the market.
Current Ratio
The current ratio will help us understand ASNA’s liquidity, meaning how quickly the company can turn its assets into cash in order to pay off its short-term obligations.
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Figure 1 Financial Statement Data | 2014 | 2013 | 2012 | 2011 | Current Assets | 923.6 | 942.8 | 1040.0 | 760.5 | Current Liabilities | 631.9 | 652.6 | 685.6 | 382.2 | Total Liabilities | 1390.0 | 1320.0 | 1470.0 | 681.6 | Shareholders’ Equity | 1740.0 | 1560.0 | 1340.0 | 1160.0 | Inventories | 553.2 | 540.9 | 533.4 | 365.3 | Net Income | 138.2 | 155.2 | 171.8 | 170.5 | Numbers are in Millions |
Figure 2 Financial Ratios | 2014 | 2013 | 2012 | 2011 | Current Ratio
Current Assets/Current Liabilities | 1.46 | 1.44 | 1.52 | 1.99 | Debt-to-Equity Ratio
Total Liabilities/Shareholders Equity | 0.80 | 0.85 | 1.10 | 0.59 | Quick Ratio
(Current Assets-Inventories)/Current Liabilities | 0.59 | 0.62 | 0.74 | 1.03 | Return on Equity Ratio
Net Income/Shareholder's Equity | 0.08 | 0.10 | 0.13 | 0.15 |
References
Ascena Retail Group Inc.. (2016, January). For Investors. Retrieved from http://www.ascenaretail.com/investors.jsp
Market Watch. (2016, January). Ascena Retail Group Inc.. Retrieved from http://www.marketwatch.com/investing/stock/asna/financials/balance-sheet
Parrino, R., Kidwell, D., & Bates, T. (2012). Fundamentals of Corporate Finance (2nd ed.). Hoboken, NJ: John Wiley & Sons Inc..
Yahoo Finance. (2016, January). Ascena Retail Group Inc. (ASNA). Retrieved from
Financial ratios are important in assessing the two companies’ performances. Referring to Exhibit A and B, we see that Sears relied heavily on debt financing. Although its 1997 ROE was high, it had a 300 days cash conversion cycle and a slow A/R turnover ratio. After evaluating various ratios, we concluded that the driving force behind Sears’ profitability was its proprietary card business. For a retailer, a strategy of using flexible payment options to boost sales is not a viable long term solution. The slow A/R turnover and negative operating cash flow cause concerns. On the other hand, Wal-Mart had a quick cash conversion cycle of 91 days, and a working capital turnover of 24/yr (vs.10/yr for Sears). These ratios represent a retail company with sound fundamental strategies, as well as the implementation and execution of those strategies. The financial ratios gave us insights into the companies’ operating and financing strategies, putting the two companies’ annual results into
Ross, S. A., Westerfield, R. W., & Jordan, B. D. (Eds.). (2011). Essentials of corporate finance (7th ed., Rev.). New York, NY: McGraw-Hill Irwin.
Current Ratio: Current ratio measures the capability of the company in paying current liability. Higher the current ratio, better the liquidity position of the company. Generally, a current
The purpose of this paper is to advise analyze the financial statements of Dillard’s, Inc. in order to recommend whether or not my client should invest $1 million in the large retail company. I will compare the financial statements of Dillard’s, Inc. its competitor, Kohl’s Corporation. Investing in retail can be risky because a retail company’s performance is very heavily influenced by factors that have nothing to do with the actual company such as the overall performance of the economy or the weather during the holiday shopping season. There is, however, potential for profitability within the retail sector. Based on my analysis, I recommend that the client should not invest in Dillard’s, Inc. for the following reasons. First, Dillard’s has experience a decline in net income in the last three years. Second, liquidity ratios indicate that they could face possible liquidity constraints in the future. Third, long-term debt paying ability ratios indicate that the company could have trouble paying off the principal of its current debt obligations. Fourth, the profitability ratios are well below industry averages, suggesting that there are more profitable companies to invest in within the industry. And finally, Investor analysis ratios provide mixed opinion of the future performance of the company. I conclude that retail can be a profitable industry to invest in if an investor has the risk tolerance and risk capacity to withstand the uncertainty, but neither Dillard’s
This ratio indicates a company’s liquidity. It depicts how many dollars of current assets exist for every dollar in current liabilities. The ratio is the higher, the better. Home Depot and Lowe’s has increasing current ratio while Home Depot has a slightly higher one.
Liquidity ratios measure how well a company is able to meet its short term obligations without relying on selling inventory (David, Fred). Starbucks three main components in these current categories are cash, inventory and accrued liabilities. The current ratio indicates that if Starbucks needed to liquidate they would be able to cover their current liabilities. They would be unable to meet their outside obligations without selling off inventory to
Also, according to its leverage ratios, the company’s debts are not only very high, but are also increasing. Its decreasing TIE ratio indicates that its capability to pay interests is decreasing. The company’s efficiency ratios indicate that despite the fact that its fixed assets are increasingly being utilized to generate sales during the years 1990-1991 as indicated by its increasing fixed asset turnover ratio, the decreasing total assets turnover indicate that overall the company’s total assets are not efficiently being put to use. Thus, as a whole its asset management is becoming less efficient. Last but not the least, based on its profitability ratios, the company’s ability to make profit is decreasing.
Liquidity ratios measure the short term ability of a company to pay its obligations and meet their needs for maintaining cash. According to Cagle, Campbell & Jones (2013), “A good assessment of a company’s liquidity is important because a decline in liquidity leads to a greater risk of bankruptcy” (p. 44). Creditors, investors and analysts alike are all interested in a company’s liquidity. After computing liquidity
Liquidity ratios measure the ability of a firm to meet its short-term obligations. A company that is not able
Parrino, R., Kidwell, D.S., & Bates, T. W. (2012). Fundamentals of Corporate Finance (2nd ed).
Liquidity In analyzing liquidity of the company, the current ratio is not very telling of a falling company. The company increased its ratio throughout the period of the income statement thus building upon its company assets and allowing for a 6-1 ratio of assets over its liabilities. This implies the company is still able to operate sufficiently even though it did not make its optimum current ratio of about 8-1. However, when one takes the inventory out of the equation with the quick ratio, the numbers show the true strength of short term liquidity. The numbers are still good, and do not indicate failure – but are
Current Ratio is the measure of short-term liquidity. It indicates that the ability of an entity to meet its
The current ratio lets one know what is exactly happening in the business at the present time. The current ratio is defined as current assets such as accounts receivables, inventories any type of work in progress or cash that are divided by the business current liabilities. Business liabilities can consist of many things such as insurance on building, employee insurance these liabilities way heavy on any type of business especially one that is large as Landry’s Restaurant.
These ratios help company in determining its capability to pay short-term debts. Liquidity ratios inform about, how quickly a firm can obtain cash by liquidating its current assets in order to pay its liabilities. General liquidity ratios are: current ratio and quick ratio. Current ration can be obtain by dividing company’s current assets by its’ current liabilities. Generally a current ratio of two is considered as good (Cleverley et al., 2011). Quick ratio also known as acid test determines company’s liabilities that need to be fulfilled on urgent basis. Quick ratio can be obtained by dividing quick assets by current liabilities. Quick ratio is considered as stricter because it excludes inventories from current assets. Generally a quick ratio of 1:1 is considered as good for the company. Higher quick
REFERENCES•Ross, S.A., Westerfield, R.W., Jaffe, J., Jordan, B.D. "Modern Financial Management". McGraw-Hill, Eighth Edition, (2008)•R.A. Brealey and S.C. Myers, "Principles of Corporate Finance", McGraw-Hill, Seventh Edition, (2003).