Question

QUESTION: The following 5 pictures are a part of real life AEO financial statements. Can you help me analyze the following....I need to use the liquidity, solvency, and profitability ratios to prepare a two year ratio analysis of AEO using the two most recent years on the following 5 statements pictured. Then, in your opinon what is the finanical strength and overall profitability of AEO, and why? Thank you for your help!

Item 6. Selected Consolidated Financial Data. The following selected Consolidated Financial Data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, included under Item 7 below and the Consolidated Financial Statements and Notes thereto, included in ltem 8 below. Most of the selected Consolidated Financial Statements data presented below is derived from our Consolidated Financial Statements, if applicable, which are fied in response to terms below. The selected Consolidated Statement of Operations data for the years ended February 2 2013 and January 28, 2012 and the selected Consolidated Balance Sheet data as of February 1, 2014. February 2, 2013 and January 28, 2012 are derived from audited Consolidated Financial Statements not included herein. For the Year Ended In thousands, except per share amounts, ratios and other January 30, January 31, February 1, February 2 January 28, financial information) 2016 2015 2014 2013 2012 Summary of Operations Total net revenue $3.521.848 $3.282,867 $3,305,802 $3,475,802 $3,120,065 Comparable sales increase (decrease) 7% (5) (6)% 9% 45 Gross profit $1,302,734 $1,154,674 $1,113,999 $1.390.322 $1,144.594 Gross prolt as a percentage of net sales 37.0% 352% 33.7% 40.0% 36.75 Operating income $ 319.878 $ 155.765 $141,055 $ 3946065 269,335 Operating income as a percentage of net sales 9.1% 11.4% 8.6% Income from continuing operations $ 213.291 $ 88,787 $ 82.983 $ 254 098 $ 175.279 Income from continuing operations as a percentage of net sales 615 26% 2.5% 76% 5.6% Per Share Results Income from continuing operations per common share-basic 1.10 $ 0.46 5 0.43 1.355 0.90 Income from continuing operations per common share-diluted 1.095 246 S 0.43 $ 1.32 $ Weighted average common shares outstanding - basic 194,351 194,437 192.802 196.211 194,445 Weighted average common shares outstanding - diluted 196.237 196,135 194,475 200.685 196.314 Cash dividends per common share $ 0.50 $ 0.50 $ 0.38 $ 2055 0.44 Balance Sheet Information Total cash and short-term investments $ 250,067 $ 410,697 $ 428.935 $ 630,992 $ 745,044 Long-term investments $ 5 $ 847 Total assets $1,512.246 $1,696,908 $1,694,164 $1,756,053 $1,950.802 Short-term debt $ - $ $ Long-term debt $ $ $ $ $ Stockholders' equity $1.051,376 $1,139,746 $1,166,178 $1.221.187 $1.416.851 Working capital $ 259.693 $ 368,947 5462,604 $ 547,668 5833.326 Current ratio 1.56 1.80 211 2.49 3.06 Average return on stockholders' equity 19.9% 7.0% 7.0% 17.6% 11.08 Other Financial Information Total stores at year-end 1,047 1,066 1.044 1,069 Capital expenditures S 153.256 5 245,002 $ 278,499 $ 93,939 $39.488 Net sales per average selling square foot $ 545 5 5255 5475 5025 547 Total selling square feet at end of period 5.285.025 5.294.744 5.205.948 5.028.490 Net sales per average gross square foot $ 436 420 $ 4445 489 $ 438 Total gross square feet at end of period 6,601,112 6,613,100 6,503.486 6.023 278 6.290,254 Number of employees at end of period 37.800 38.000 40.400 40,100 39,800 0.99 $ 1,056 2015 Annual Report 15

Answer 1

LIQUIDITY RATIO:
Liquidity ratios gives an insight of the company's ability to meet the short term obligations. There are various ratios like Current ratio, Quick ratio and Cash ratio.

Current ratio is measure of current assets with current liabilities to meet short term liabilities.

Current ratio = Current assets/Current liabilities

AEO
Year	Current Assets	Current Liabilities	Current Ratio
	1	2	1:2
2016	723,375	463,682	1.56
2015	828,040	459,093	1.80

Current ratio has declined from 1.80 (2015) to 1.56 (2016) and might impact the company's ability to meet short term current liabilities as compared to the position in 2015.

Quick ratio is calculated as = Current assets less inventory divided by Current liabilities.

AEO
Year	Current Assets	Merchandise Inventory	Current assets less inventory	Current Liabilities	Quick Ratio
	1	2	3=1-2	4	3:4
2016	723,375	305,178	418,197	463,682	0.90
2015	828,040	278,972	549,068	459,093	1.20

Quick ratio has also declined from 1.20 (2015) to 0.90 (2016) which impacts the company's ability to repay its short term liabilities and impacts the liquidity position of the company./

Cash ratio is calculated as Cash and cash equivalents (bank balances) divided by current liabilities.

AEO
Year	Cash and cash equivalents	Current Liabilities	Cash ratio
	1	2	1:2
2016	260,067	463,682	0.56
2015	410,697	459,093	0.89

Cash ratio has also declined from 0.89 (2015) to 0.56 (2016) which impacts the company's ability to repay its short term liabilities and impacts the liquidity position of the company.

All the liquidity ratio calculated above has decreased in 2016 as compared to 2015 and has severly impacted the liquidity position of AEO.

SOLVENCY RATIO:

Solvency ratio takes into account the company's ability to meet its total liabilitites. This is compared with total assets or total equity.

a) Debt to Equity ratio is calculated as total liabilities divided by total equity

AEO
Year	Current Liabilities	Non-current liabilities	Total liabilities	Total shareholder's equity	Debt to equity ratio
	1	2	3=1+2	4	3:4
2016	463,682	97,188	560,870	1,051,376	0.53
2015	459,093	98,069	557,162	1,139,746	0.49

The above shows that AEO is financed by creditors and lenders has increased from 49% (2015) to 53% (2016) as compared to the contribution from the shareholder's which has reduced impacting the solvency of the company.

b) Debt to Assets ratio is calculated as total liabilities divided by total assets

AEO
Year	Current Liabilities	Non-current liabilities	Total liabilities	Total assets	Debt to Assets ratio
	1	2	3=1+2	4	3:4
2016	463,682	97,188	560,870	1,612,246	0.35
2015	459,093	98,069	557,162	1,696,908	0.33

The above shows that AEO is financed by creditors and lenders has increased from 33% (2015) to 35% (2016) for the total firm and hence the funding from them have increased impacting the solvency of the company.

As calculated above, both the solvency ratio has increased and hence it is impacting the solvency of the company as the dependency on the funding from creditors and lendors have increased.

PROFITABILITY RATIO:
Profitability ratio gives insight of the profitabillity of the company and it gives a comparison of the performance across various periods.

a) Net profit margin ratio is calculated as net income divided by total sales.

AEO
Year	Net income	Total net revenue	Net profit margin
	1	2	1:2
2016	218,138	3,521,848	6%
2015	80,322	3,282,867	2%

Net profit margin has increased from 2% (2015) to 6% (2016) which shows increase in the profitability of the company.

b) Return on equity is calculated as net income divided by total equity:

AEO
Year	Net income	Total shareholders equity	Return on equity
	1	2	1:2
2016	218,138	1,051,376	21%
2015	80,322	1,139,746	7%

Return on equity has increased from 7% (2015) to 21% (2016) which shows increase in the profitability of the company. The return for shareholder's have increased on the amount they have invested.

c) Return on Investments is calculated as net income divided by total assets:

AEO
Year	Net income	Total assets	Return on investments
	1	2	1:2
2016	218,138	1,612,246	14%
2015	80,322	1,696,908	5%

Return on investment has increased from 5% (2015) to 14% (2016) which shows increase in the profitability of the company. The return for total amount invested in the firm have increased on the amount invested.

As calculated above, the profitability ratio has been increasing and the company is performing well.