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Ratio Analysis

Financial Statement Analysis Project – “Guess, Inc.” and “The Gap”
FI 504 – Accounting and Finance: Managerial Use and Analysis
October 13, 2008

I. Liquidity Ratios
Liquidity shows the degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Also it the ability to convert an asset to cash quickly, known as "marketability.”
For an investor it is safer to invest in liquid asset then illiquid ones because it is easier to get his money out of the investment.
Current ratio measures a company’s ability to pay short-term obligations. Both companies are able to pay back their short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. Both companies’ ratios are above one, which means they can pay off their obligations. It shows the companies are financially healthy.
Current ratio of Guess, Inc. was lower than Current ratio of The Gap during four years from 2004 to 2007, but is was stable. The Gap’s current ratio decreased slightly, it means its liquidity needs further investigation.
Investors and managers use the relationship among sales, accounts receivable, and cash collections to evaluate the companies’ liquidity. The Receivables Turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. A high ratio implies either that a company operates on a cash basis, or that its extension of credit and collection of accounts receivable is efficient.
A low ratio implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm. Average collection period should be consistent with corporate credit policy. The increase in Average Collection Period of Guess, Inc. and The Gap may suggest a decline...