Abercrombie&Fitch Financial Analysis
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ACCOUNTING 6000
FINANCIAL PAPER ANALYSIS
Introduction:
The structure of the paper will be as follows: First, the purpose and objectives of the fnancial analysis will be streched out, and the target audience will be identified. Second, an initial review of the company that will be taken into consideration, “ABERCROMBIE & FITCH” will be conducted. Third, horizontal and vertical analyses with the help of the three major financial statements of the Abercrombie&Fitch Annual Report (Income Statement, Balance Sheet, and Statement of Cash Flows) will be conducted. Unusual trends will be identified. Additionally, ratios for the financial statemenst will be classified into four broad groupings, based on the characteristics that particular ratios are intended to measure. These groupings are (1) liquidity, (2) profitability, (3) capital structure, and (4) investor ratios. Finally, the ratio results will be reviewed and examined before giving a recommendation and final statement.
Focus:
The “Stern”, which is the biggest news-magazine in Germany, published an article about Abercrombie&Fitch, the popular US-American clothing chain, this summer, mentioning the success and expansion plans of this company. This brought to mind the idea of analyzing Abercrombie&Fitch, supposing to be a potential investor, who would like to buy Abercrombie&Fitch stock. So, before making a final decision the financial statement analysis will help to support the authors decision at this point of time.
Initial Review:
Abercrombie&Fitch, through its subsidiaries, operates as a specialty retailer in the United States and Canada. Its stores sell casual apparel under the Abercrombie & Fitch, abercrombie, Hollister, and RUEHL brands. As of April 1, 2006, it operated 850 stores in 49 states, the District of Columbia, and Canada. The company was founded in 1892 and is headquartered in New Albany, Ohio. Abercrombie&Fitch employs about 6,900 people in the United Staes and Canada., having a market capitalization of $ 6.07 billion.
Analysis of the three primary statements:
As being a potential investor, a financial statement analysis is needed in order to help decide whether to increase or decrease ownership interests in the firm. The decisions are based on projections of investments risks and returns. All the numbers are calculated in thousands.
Liquidity ratios: These selected ratios indicate short term solvency of the firm, and also how effectively the firm is managing its working capital.
Current ratio
= Current Assets / Current Liabilities = $947084 / $ 491554 = 1.93
Quick ratio
= Monetary Current Assets/ Current Liabilities = (Current Assets –
Inventories) / Current Liabilities
= ($ 947084 – $ 362536) / $ 491554
= 1.19
Number of days sales in inventory = Ending Inventory / Cost of Goods Sold per Day
= $ 146341 / ($933295 / 365)
= 57.23 days
Profitability Ratios: they are the second major focus of analysis for any investor. Without profits there will be no return to the investor or no one will want to invest.
Gross profit margin = Gross Profit / Net Sales Revenue
= $ 1851416 / $ 2784711
= 66.49 %
Operating Income Ratio = Operating Income / Net Sales Revenue = $542738 / $2784711
= 19.49 % (End of 2005)
= 17.20 % (End of 2004)
ROE = Net Income / Av. Shareholders Equity
= $ 333986 / (($669326 + $ 995117)/2)
= 40.13 %
Quality of income = Cash Flow from Op. Activities / Net Income = $ 453590 / $ 333986
= 1.34%
Capital structure: these calculations assess the firms strategies for financing its assets and indicates the relative amounts of debt and equity capital.
Percentage composition: All sources of capital must add up to 100%.
Current Liabilities / Total Liabilities + Shareholder Equity
= $ 491554 / $ 1789718
= 24.47 %
Deferred taxes and other similar liabilities / Total Liabilities + S.h. Equity
= $ 303047 / $ 1789718
= 16.93 %
Shareholders Equity / Total Liabilities + Shareholders Equity
= $ 38496 / $ 1789718
= 2.15 %
Long-Term Debt / Total Liabilities + Shareholders Equity
= $ 995117 / $ 1789718
= 55.6 %
24.47 % + 16.93 % + 2.15 % + 55.60 %
= 99.2 %
Financial leverage = Total Liabilities / Total Assets
= ($ 491554 + $ 303047) / $ 1789718
= 0.444 = 44.4 %
Investor ratios: all relate to an external dimension of ownership interest. Helps to indicate how Abercrombie&Fitch is performing with regard to the market value of its shares.
Earnings p. Share
= Net Income / Weighed Average Number of Shares Outstanding
= $ 333986 / ((87161+91221)/2)
= 3.745
Price to Earnings (P/E) = Market Price per Share / Earnings per Share