Reebok & La Gear Analysis of Two Very Different Companies Essay

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Walter Garcia Brooks Date: 10/5/2012 Reebok & LA Gear Analysis of two very different companies 1. Looking at both companies Return on Equity is pretty comparable between the two in 1990. However, we can see that LA Gear had a much better performance in the previous two years with a precipitous RoE in 1990 as compared to the previous two years. Reebok on the other had has reported a stable RoE in the last three years. Looking at the component ratios of RoE we can see some some differences why LA Gear has had a huge drop on RoE lately. The three components of RoE are illustrated below: Profit Margin Cost control Pricing Asset Turnover Ratio Asset utilization Financial Leverage Ratio For example, Profit Margin, which is a…show more content…
On the other hand, we see that Reebok had a somehow constant Profit Margin around 8.5%. The Total Asset Turnover or ROA (Return on Asset) lets us know how effectively assets generate revenue. Accounts Receivable Turnover tells us how effectively a company is collecting money from sales. As we can see, both companies are doing pretty comparable and so far, this does not explain the sudden cliff on Profit Margin. 2. The single most important assessment in Cash Flows in the “cash flow from financial operations” because it provides an overlook on management’s operating decisions. In this case, we can see that Reebok had reported positive cash flows from operations, for example in 1990 reported $39.2M while LA Gear reported a negative (40M) the same year. Looking closely, we can see that LA Gear was retaining huge quantities of inventory while at the same time, not collecting enough money from customers (A/R). Hence we can conclude that for Reebok, operations was a source of cash but on the other hand, LA Gear was quite the opposite: operations was a use (or drain) of cash. Turning our attention to “cash flows from financing activities” we can see that more differences. Reebok is borrowing little money, instead it is paying loans. LA Gear is borrowing huge quantities of money, for example in 1990 it borrowed $56M. As a result of this, we can see where the money to finance

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