Question

please talk about some of the ratios and what they mean. also please compare the ratios of SNEAKS to the ratios of HERMES. provide an explanation of what the ratios measure and why it is important/not important to a shoe company.

refelct on which ratio category SNEAK should focus on, in terms of areas of improvement. how might they improve those ratios?

B C SNEAK HERMES 1.36 0.64 1.44 0.87 47.97 5.47 1.75 28.18 10.12 1.75 3.02 68.11%% 2.15 42.15% 1 Financial Ratios Comparison 2 3 Liquidity Ratios 4 Current ratio 5 Quick Ratio 6 7 Asset Management Ratios 8 Days sales outstanding 9 Inventory turnover (sales/inventory) 10 Total asset turnover 11 12 Debt ratios 13 Times interest earned 14 Total debt to capital 15 16 Market ratios 17 Profit margin 18 ROA 19 ROE 20 ROIC 21 22 Other 23 Operating margin 24 P/Eratio 25 EPS 26 Market to book 27 Basic earning power 28 Book value per share 29 Dividend per share 30 31 32 33 2.07% 3.62% 13.91% 4.25% 1.05% 3.58% 12.98% 7.02% 4.75% 12 $3.62 1.67 8.31% $26.00 $1.27 4.88% 13.00% $3.55 1.98 8.51% $25.59 $0.50 34

Answer 1

Let us discuss some of the ratios from the point of view of a shoe company.

1.Current Ratio: This ratio is equal to Current Asset/Current Liability. This ratio tells us the liquidity position of the company to meet is short term financial obligations.

For a shoe conmpany, this ratio is important as a healthy liquidity position allows the smooth operation of firm on a day to day basis.

Current ratio of SNEAK is 1.36 & HERMES is 1.44. Any current ratio above 1 is ideal. However, HERMES has a better liquidity position than SNEAK. However, a very high current ratio is also not desirable as it means the firm is not effectively utilizing is liquid asset properly.

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2.A shoe company has huge inventories and hence it is important to evaluate that using Inventory Turnover Ratio.

Inventory Turnover Ratio = Sales/Inventory . This ratio tells us as to how many times the inventory has been sold and replaced. The higher the ratio , the better as it indicates efficiency.

Inventory Turnover of SNEAK is 5.47 & HERMES is 10.12. This shows that HERMES has a high turnover i.e atleast 10 times in a year when compared to 5.47 times for SNEAK.

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3.Times Interest Earned for a shoe making firm tells its ability to pay its interest expenses on the long term loans. If a firm has a less ratio, then it means it is not earning enough to fulfil its current interest obligaton and that raises many questions.

Times Interest Earned = Earnings Before Interest & Tax/ Interest Expenses

Times Interest Earned of SNEAK is 3.02 & HERMES is 2.15. In this case, SNEAKS is in a better position to pay back its interest obligation than HERMES. However, both firms are comfortably have a ration >2 and hence are placed at a comfortable position to meet their interest obligations.

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4.Days Sales Outstanding(DSO) is the no. of days a firm takes to get back its receivables. Ideally, the firm must target to get back the receivables as quickly as possible.

Days Sales Outstanding = 365/Receivables turnover & Receivables Turnover = Net credit Sales/Avg. Accounts Receivables

DSO for SNEAK is 47.97 & for HERMES is 28.18. It can be seen that HERMES takes lesser no. of days than SNEAK to get back its receivables, which means it will encounter lesser cash flow problems than SNEAK.

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Profit Margin is Net Profit/ Total Sales. This ratio tells us the percentage profit with respect to sales and is an important metric as the aim of any firm is to generate more and more profits.

Profit Marign for SNEAK is 2.07% & for HERMES is 1.05%. SNEAK earns a higher profit margin than HERMES. The reason can be many. Maybe, SNEAKS has higher sales or less operating expenses. Nevertheless, it is an important metric to evaluate.

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6.Total Debt to Capital ratio tell us about the percentage of debt availed in the entire capital structure. Too much debt is also not desirable.

Total Debt to Capital for SNEAK is 68.11% & for HERMES is 42.15%

SNEAK's debt percentage is almost 70% which is on a higher side. This also means is is paying more interest expenses than HERMES. Howeever, its Times Interest Earned ratio of above 3% shoes that SNEAK is comfortably placed to fulfill its interest obligation. After, all this its profit margin is also more than HERMES. So, SNEAK justifies its higher debt percentage.

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