Question

Two of the largest chains of clothing stores in the United States are The Gap, Inc. and Abercrombie & Fitch Co. In fiscal 2011, Gap had net income of $833 million and Abercrombie & Fitch had net income of $128 million. It is difficult to judge from these figures alone which company is more profitable because they do not take into account the relative sales, sizes, and investments of the companies. Data (in millions) needed for a complete financial analysis of the two companies follow:

REQUIRED:

Gap Abercrombie & Fitch Net sales $14.549 $4.158 Beginning total assets $7.065 $2.941 Ending total assets $7.422 $3.048 Beginning total liabilities $2.985 $1.051 Ending total liabilities $4.667 $1.186 Beginning stockholders' equity $4.080 $1.891 Ending stockholders's equity $2.755 $1.862

a) Determine which company was more profitable by computing profit margin, asset turnover, the debt to equity ratio, return on assets, and return on equity for the two companies. Comment on the relative profitability of the two companies (round to one decimal place or the nearest tenth of a percent).

b) What do the ratios tell you about the factors that go into achieving an adequate return on assets in the clothing retail industry? For industry data, consider an average profit margin of 4,2% and an asset turnover of 1,5 times.

Answer 1

		GAP	Abercrombie&fitch
A	profit margin=net income/sales	833/14.549=57.25 times	128/4.158=30.78 times
	asset turnover=total sales/average assets	14.549/(7.065+7.422)/2=2	4.158/(2.941+3.048)/2=1
	debt equity ratio=average liabilities/average equity	(2.985+4.667)/2/(4.080+2.755)/2=1.12	(1.051+1.186)/2/(1.891+1.862)/2=.6
	return on asset =netincome/average assets	833/(7.065+7.422)/2=115	128/(2.941+3.048)/2=43
	return on equity=net income/average equity	833/(4.080+2.755)/2=244	128/(1.891+1.862)/2=68
	comment on relative profitability:while analysing from the above calculations,we can see that profit margin is higher in GAP and also
	in return on asset ratio in GAP is about more than two times of than abercrombie & fitch.
B	return on assets is an indicator of how profitable a company is relative to its total assets.it gives a manage,investor,or analyst an idea of how efficient the companys management inmaking incomes using the assets.