Accounting Ratio Analysis of Abercrombie & Fitch Co
Introduction
Abercrombie & Fitch Co. is a company that was incorporated in 1996 in Delaware. The company operates various retail stores selling a wide array of products, including: graphic t-shorts, casual sportswear apparel, woven and jeans pants, sweaters, shorts, personal care products and accessories for women, men and kids. This paper calculates various accounting ratios from Abercrombie & Fitch Co. latest financial statements which were for the financial year ended 29th January 2012 to facilitate investment decision making.
Test of Liquidity
Current Ratio = Current Assets/ Current liabilities
= 1,488,775/705,353 = 2.11
The current ratio of 2.11 implies that the company can pay its maturing obligations using current assets 2.11 times.
Acid test Ratio = [Current Asset – Inventories]/Current Liabilities
= [1,488,775-569,818]/705,353 = 1.3
The acid test ratio of 1.3 implies that the company can pay its maturing obligations using most liquid assets 1.3 times.
The current ratio and the acid test ratio of the industry is 2.3 and 1.6 respectively.
Asset Management
Inventory Turnover = Cost of Sales/ Average inventories
Where; average inventories = [Opening inventories + Closing inventories]/2
= [569,818 + 385,857]/2 =
Inventory turnover = 1,639,188/477,837.5 = 3.43
The inventory turnover ratio of 3.43 implies that the company converts inventories into sales 3.43 times in a year.
Accounts Receivable Turnover = Credit Sales/Average Accounts Receivable
Where;
Average Accounts Receivable = [Opening Accounts Receivable + Closing Accounts Receivable]/2
= [89,350 + 74,777]/2 =82,063.5
Since credit sales could not be obtained, we assume all sales were on credit.
Accounts Receivable Turnover = 4,158,058/82,063.5 = 50.67
The inventory turnover of the industry is 4.36 while accounts receivable turnover is 68.27.
Test of Solvency and Equity Position
Debt Ratio = Total Liabilities/Total Assets
= [705,353+480,344]/3,048,153 = 0.389
The debt ratio implies that the company financed 38.9% of its assets using debt. The company is lowly geared since the debt ratio is less than 50%. Therefore, the company has a low solvency risk.
Times Interest Earned Ratio = Operating Income/ Interest Expense
= 190,030/3,577 = 53.12
The times interest earned ratio implies that the company can pay interest charge 53.12 times from its current operating income. The times interest earned ratio of the industry is 38.61.
Test of Profitability
Return on Net Sales = [Operating Profit/ Sales]*100%
= [190,030/4,158,058]*100% = 4.57%
The industry average is 13.09%
Return on Total Assets = [Operating Profit/ Total Assets]*100%
= [190,030/3,048,153]*100% = 6.23%
Return on Common Stockholder’s Equity = [Net Income/ Common Stockholder’s Equity]*100%
= [127,658/1,862,456]*100% = 6.85%
Earnings per Share of Common Stock (Basic)
= Earnings Attributable to Equity Shareholders/ Weighted Average Number of Common Stock
= 127,658/86,848 = 1.47
Market Analysis
Price/Earnings Ratio = Market Price per Share/Earnings per Share
According to NASDAQ website, the current market price (5th December 2012) is 45.23.
Price/Earnings Ratio = 45.23/1.47 = 30.76
According to the Reuters.com, the industry average Price/Earnings Ratio is 25.94
Dividend Yield Ratio = [Dividend per Share/ Market Price per Share]*100
= [0.70/45.23]*100 = 1.56%
According to the Reuters.com, the industry Dividend Yield Ratio is 1.75
Conclusion
I would not invest in Abercrombie & Fitch Co. The performance of the company is below the industry performance. The liquidity position of the company is below the industry average as indicated by the current ratio and acid test ratio. The company asset management is poor compared to the industry averages. The inventories turnover and accounts receivable turnover is below the industry averages. However, the solvency position is higher than the industry average as indicated by the times earned interest ratio. The company has a lower profitability compared to the industry as indicated by the return on net sales. Similarly, the return I would receive from investing in the company is lower compared to the industry average as indicated by the dividend yield.
References
Abercrombie & Fitch . (2012, January 28). Retrieved December 6, 2012, from http://www.abercrombie.com: http://www.abercrombie.com/anf/investors/investorrelations.html
NASDAQ. (2012, December 5). Quotes & Resaerch. Retrieved December 6, 2012, from http://www.nasdaq.com: http://www.nasdaq.com/symbol/anf
Reuters. (2012, December 6). Abercrombie & Fitch Co (ANF). Retrieved December 6, 2012, from http://www.reuters.com: http://www.reuters.com/finance/stocks/financialHighlights?symbol=ANF
