FINANCIAL STATEMENT ANALYSIS - Assignment Example

Number of Project: Financial ment Analysis Company American Eagle Outfitters, Inc. (AEO)American Eagle Outfitters, Inc.(b) Primary business activity of the firmAmerican Eagle Outfitters is an American clothing and accessories retailer which is based in Pittsburgh, Pennsylvania. Mark and Jerry Silverman were the founders of the company in 1977 as a subsidiary of Retail Ventures, Inc. which also owned and operated Silverman’s Menswear. Ownership interests were sold by the Silvermans in the year 1991.

The brand of the company particularly targets 15 to 25 years old males and females covering mainly the U.S. and Canada and having retail stores hovering around 929 with an online store as well. Low-rise jeans, graphic T-shirts, polo shirts, Henley shirts, outer wear and swimwear are some constituents of AEO’s most popular products. The first store to be opened globally was in Middle East in Dubai.(c) Financial Statement RatiosKey Financial Statement RatiosMost Recent Year (2011)Prior Year (2010)Industry AverageCurrent Ratio3.02.92.

4Accounts Receivable Turnover305.3298.278.2Inventory Turnover6.05.45.0Debt to Equity Ratio0.40.41.1Return on Equity10.4%10.7%30.0%Price Earnings Ratio11.72xn/an/a(d) Ratio Analysis(i) Current Ratio: The current ratio signifies a company’s ability to pay off its short term obligations that is the ability to cover up short-term liabilities (debt and payables) with short-term assets (cash, inventory and receivables). The higher the current ratio, the higher the ability of the firm to payoff short-term obligations but it can also depict inefficiency in handling illiquid assets such as inventory.

AEO depicts a favorable trend in terms of this ratio as it has elevated from 2.9 in 2010 to 3.0 in 2011. In contrast with the industry average, the company has performed quite well. But such a high current ratio can also show inefficiency in handling illiquid assets such as inventory but this cannot be determined without the help of Quick ratio.(ii) Accounts Receivable Turnover: This ratio talks about the management efficiency of a firm in collecting cash from debtors who were sold goods on credit by the firm; the ratio is computed in times and shows how many times a firm generates and collects cash from debtors in a year.

The higher the turnover, the more the efficient the firm is but this would also depict an aggressive or tightened credit policy and can lead to lesser sales generation. American Eagle Outfitters’ trend of Accounts receivable turnover is favorable as it has increased from 2010 to 2011. This compared to the industry shows a way higher ratio and depicts that it operates a very aggressive credit policy.(iii) Inventory Turnover: This ratio again comes under management efficiency of a company and depicts that how many times a year the inventory had been sold for cash and re-stocked; the higher the turnover the more efficient the management of the firm is.

The trend of this ratio is favorable for American Eagle as it has increased in the two years reported. In contrast with the industry average, the company has performed quite well as it has a higher turnover in 2011 (6.0 times).(iv) Debt to Equity: This ratio measures a company’s financing supplied by creditors that are debt issuers and financing supplied by owners that are shareholders and depicts a picture about the company’s long-term solvency. The higher the ratio the higher the risk that the company will bear as its cash flow from operations will have more burden to cover its interest and principal payments.

AEO’s debt to equity ratio has remained the same (0.40) in both 2010 and 2011 and shows a stagnant trend. In comparison with the industry average figure, it has less debt financing as compared to equity (28.57%) which means that a larger proportion of its financing has been carried out through equity whereas industry average depicts that companies in this industry normally finance with 52% of debt and 48% of equity (computed with the help of the 1.1 debt to equity ratio, which is the average of the industry.(v) Return on Equity: This ratio measures the rate of return a firm yields on stockholders’ investment; the higher the return the better for the company and also to ensure shareholders’ satisfaction, however a lower RoE means that the firm has taken a lot of debt and is paying a large interest expense.

The trend for AEO is a little bit unfavorable as it has decreased by a meager 0.3% from the year 2010 to 2011. The company is not performing satisfactory if compared with the industry average figures which account for a 30% Return on Equity which is almost three times that of AEO.(vi) Price to Earnings Ratio (P/E): This ratio shows the multiple or times of earnings that investors are willing to pay pertaining to their perception of the share price of a company. The higher the ratio in multiples, the better growth potential the investors perceive for the company’s stock.

As this ratio is calculated daily using daily market prices of the stock, this cannot be compared on a yearly basis for the same company and also not with industry averages.(e) Earnings Per Share (EPS) Trend The above trend has been developed taking into account Normalized EPS figures for American Eagle Outfitters, Inc. of years 2007 to 2011. The bar chart depicts an unfavorable and decreasing trend over the five years reported. With only one rise in the EPS in 2008, the Normalized EPS has reduced considerably from 1.

85 in 2008 to 1.07 in 2011 accounting for a fall of 42.16% over the four years time. (f) Ratio Analysis Summary:Liquidity and Debt position: After analyzing each ratio individually, the company seems to be quite stable in terms of its liquidity situation as its current ratio is depicting a favorable trend and is quite higher than the industry average; this is the same case with Accounts Receivable and Inventory Turnover which are both on favorable and increasing trends and more efficient as compared to the industry averages.

This means that the company is quite able to pay off its short-term liabilities or obligations using its short-term assets and is quite liquid.Considering the debt situation, the company’s Debt to Equity ratio is quite low as compared to the industry at 28.57% (0.4 / 1.40) which means that the company has taken low debt which is at a level of 52% in other companies’ capital structures. AEO’s cash flow from operations will now bear less burden to payoff interest and principal payments but high equity also depict that dividend payments will be high.

Profitability position: Only Return on Equity was calculated and analyzed as a measure of the company’s profitability. This ratio depicts an almost stagnant trend and its comparison with the industry show a very bad picture as AEO’s RoE is almost 1/3 of the RoE of other companies in the same industry that is its competitors. This concludes that as AEO has a large proportion of equity in its capital structure, its roe is comparatively very low and does not give a favorable picture of the company’s profitability.

Moreover, AEO’s P/E ratio shows that its share is trading at a price 11.72 times of its earnings.(g) Cash Flow Analysis Year20072008200920102011Cash Flow from Operating Activities(in $millions)749.27464.66303.31386.46381.16Cash Flow from Investing Activities(in $millions)-651.12102.2777.27-49.0727.61The above table shows the cash flow from operations and investing activities for American Eagle Outfitters, Inc. for the five years period 2007 to 2011. The cash flow from operations show a decreasing trend from 2007 to 2009 (a cumulative fall of more than 59% over three years) followed by an increase in 2010 and a slight decrease in 2011 which is the most recent year analyzed.

Overall, the trend is unfavorable. This is not conducive for the company as this can lead to hurdles in covering negative cash flow from investing activities which are in most cases, negative for almost all companies.Cash flow from investing activities was a large negative figure in 2007 with positivity coming in 2008 and 2009. The latest figure is a positive $27.61 million figure. Apart from the year 2007 when AEO had to cover a high cash outflow generating from investing activities, it didn’t face difficulties in the next years up to 2011.

There are unusual fluctuations in cash flow from investing activities throughout the five years mentioned above. This is mainly because of purchase of fixed assets and purchase and sale / maturity of investments.Individually, in 2007, there were large purchases of investments which lead to a negative cash flow from investing activities. In 2008, a sale of investments of around $2.13 billion caused the negative figure to convert into a positive one. Purchase of fixed assets was done in every year being reported.

Positive balances were seen in 2008 and 2011 due to low transactions in the field of investments. AEO’s ability to generate positive cash flows from operations seems a little bit blurred as this is dependent on the net income and positive working capital changes, both of which are showing a decreasing trend throughout the five years being discussed; this becomes a bad sign for American Eagle Outfitters, Inc. There were substantial cash flow changes from the year 2007 to 2008, 2008 to 2009, and 2009 to 2010, all of which depict a change of more than 20%.

The main reason for the variation in 2010 was the reduction in the balance of non-cash expenses from $227.14 million to $36.98 million. The main reason was the reduction in the net income from 2008 to 2009. Change in working capital was the main reason for an increase of 27% from 2009 to 2010. There was no significant change in the year 2011.APPENDIX SECTIONAPPENDIX 1: INCOME STATEMENT(All financial data in Millions of US Dollars except per share items) 20112010200920082007Period End Date01/29/201101/30/201001/31/200902/02/200802/03/2007Period Length52 Weeks52 Weeks52 Weeks52 Weeks52 WeeksStmt Source10-K10-K10-K10-K10-KStmt Source Date03/11/201103/11/201103/11/201103/26/201004/04/2007Stmt Update TypeUpdatedRestatedRestatedRestatedUpdated      Revenue2,967.562,940.272,948.683,055.422,794.

41Total Revenue2,967.562,940.272,948.683,055.422,794.41      Cost of Revenue, Total1,796.61,766.841,751.491,632.281,453.98Gross Profit1,170.961,173.431,197.191,423.141,340.43      Selling/General/Administrative Expenses, Total713.2725.28690.79714.59665.61Research & Development0.00.00.00.00.0Depreciation/Amortization140.5137.76123.6109.288.03Interest Expense (Income), Net Operating0.00.00.00.00.0Unusual Expense (Income)1.250.9422.890.590.0Other Operating Expenses, Total0.00.00.00.00.

0Operating Income316.01309.45359.91598.76586.79      Interest Income (Expense), Net Non-Operating0.00.00.00.00.0Gain (Loss) on Sale of Assets0.00.00.00.00.0Other, Net3.5-2.3318.91-1.6742.28Income Before Tax295.08304.38377.7636.38629.07      Income Tax - Total113.1590.98147.72236.36241.71Income After Tax181.93213.4229.98400.02387.36      Minority Interest0.00.00.00.00.0Equity In Affiliates0.00.00.00.00.0U.S. GAAP Adjustment0.00.00.00.00.0Net Income Before Extra. Items181.93213.4229.98400.02387.36      Total Extraordinary Items-41.29-44.38-50.920.00.

0Discontinued Operations-41.29-44.38-50.920.00.0Net Income140.65169.02179.06400.02387.36            Total Adjustments to Net Income-0.07-0.37-0.36-0.220.0Preferred Dividends0.00.00.00.00.0General Partners Distributions0.00.00.00.00.0      Basic Weighted Average Shares199.98206.17205.17216.12222.66Basic EPS Excluding Extraordinary Items0.911.031.121.851.74Basic EPS Including Extraordinary Items0.70.820.871.851.74      Diluted Weighted Average Shares201.82209.51207.58220.28228.38Diluted EPS Excluding Extraordinary Items0.91.021.111.821.

7Diluted EPS Including Extraordinary Items0.70.810.861.821.7      Dividends per Share - Common Stock Primary Issue0.430.40.40.380.28Gross Dividends - Common Stock184.9883.9182.3980.861.52Depreciation, Supplemental139.17137.05123.22108.9287.87      Normalized EBITDA508.08506.52577.82708.55674.82Normalized EBIT367.58368.76454.22599.35586.79Normalized Income Before Tax346.65363.69472.01636.97629.07Normalized Income After Taxes213.73254.98287.41400.39387.36Normalized Income Available to Common213.65254.62287.05400.18387.

36      Basic Normalized EPS1.071.231.41.851.74Diluted Normalized EPS1.061.221.381.821.7Amortization of Intangibles1.330.720.380.280.16APPENDIX 2: BALANCE SHEET(All financial data in Millions of US Dollars) 20112010200920082007Period End Date01/29/201101/30/201001/31/200902/02/200802/03/2007Stmt Source10-K10-K10-K10-K10-KStmt Source Date03/11/201103/26/201003/30/200904/02/200804/02/2008Stmt Update TypeUpdatedUpdatedUpdatedUpdatedRestated      Assets     Cash and Short Term Investments734.7698.64483.85619.94813.81Cash122.58144.390.00.00.0Cash & Equivalents0.00.0473.34116.0659.

74Short Term Investments612.12554.2410.51503.88754.08Total Receivables, Net36.7234.7541.4731.9226.05Accounts Receivable - Trade, Net9.729.8619.9611.7326.05Notes Receivable - Short Term0.07.835.180.00.0Receivables - Other27.017.0616.3420.190.0Total Inventory301.21326.45294.93286.49263.64Prepaid Expenses53.7347.0459.6635.4933.72Other Current Assets, Total48.0660.1645.4547.051.89Total Current Assets1,174.411,167.03925.361,020.831,189.11      Property/Plant/Equipment, Total - Net643.12713.14740.24625.57481.

65Goodwill, Net11.4711.2110.7111.489.95Intangibles, Net0.00.00.00.00.0Long Term Investments5.92197.77251.01165.81264.94Note Receivable - Long Term0.00.00.00.00.0Other Long Term Assets, Total45.0848.9936.3643.9933.91Other Assets, Total0.00.00.00.00.0Total Assets1,880.02,138.151,963.681,867.681,979.56      Liabilities and Shareholders Equity     Accounts Payable167.72158.53152.07157.93171.15Payable/Accrued0.00.00.00.00.0Accrued Expenses146.35163.4136.41166.21170.47Notes Payable/Short Term Debt0.030.075.00.00.

0Current Port. of LT Debt/Capital Leases0.00.00.00.00.0Other Current Liabilities, Total73.7757.0338.2852.04123.0Total Current Liabilities387.84408.96401.76376.18464.62      Total Long Term Debt0.00.00.00.00.0Deferred Income Tax0.00.00.00.00.0Minority Interest0.00.00.00.00.0Other Liabilities, Total141.09150.68152.88151.0497.63Total Liabilities528.93559.63554.65527.22562.25      Redeemable Preferred Stock0.00.00.00.00.0Preferred Stock - Non Redeemable, Net0.00.00.00.00.0Common Stock2.52.492.492.482.

46Additional Paid-In Capital546.6554.4513.57493.4453.42Retained Earnings (Accumulated Deficit)1,711.931,764.051,694.161,601.781,302.35Treasury Stock - Common-938.02-759.26-786.8-792.68-362.63Unrealized Gain (Loss)0.0-6.40.00.00.0Other Equity, Total28.0723.24-14.3935.4921.71Total Equity1,351.071,578.521,409.031,340.461,417.31      Total Liabilities & Shareholders’ Equity1,880.02,138.151,963.681,867.681,979.56            Total Common Shares Outstanding194.37206.83205.28204.48221.

28Total Preferred Shares Outstanding0.00.00.00.00.0APPENDIX 3: CASH FLOW STATEMENT(All financial data in Millions of US Dollars) 20112010200920082007Period End Date01/29/201101/30/201001/31/200902/02/200802/03/2007Period Length52 Weeks52 Weeks52 Weeks52 Weeks52 WeeksStmt Source10-K10-K10-K10-K10-KStmt Source Date03/11/201103/11/201103/11/201103/26/201003/30/2009Stmt Update TypeUpdatedReclassifiedReclassifiedReclassifiedReclassified      Net Income/Starting Line140.65169.02179.06400.02387.

36Depreciation/Depletion145.55139.83126.36110.7589.7Amortization0.00.00.00.00.0Deferred Taxes11.89-36.0324.47-8.15-27.57Non-Cash Items74.2580.4851.1536.98227.14Discontinued Operations19.8530.519.120.00.0Unusual Items25.673.6924.010.990.0Other Non-Cash Items28.7246.2818.0236.0227.14Changes in Working Capital8.8333.16-77.73-74.9472.65Accounts Receivable-3.796.66-10.02-5.667.45Inventories18.71-33.7-5.63-19.07-53.53Prepaid Expenses-9.0512.92-23.18-1.33-4.2Other Assets-1.381.150.39-3.24-5.36Accounts Payable5.238.36-3.47-15.5632.

35Accrued Expenses6.5533.12-52.44-34.7188.15Other Liabilities-7.454.6716.624.647.79Cash from Operating Activities381.16386.46303.31464.66749.27      Capital Expenditures-84.26-127.08-243.56-250.41-225.94Purchase of Fixed Assets-84.26-127.08-243.56-250.41-225.94Other Investing Cash Flow Items, Total111.8778.01320.84352.68-425.18Sale of Fixed Assets0.00.00.00.012.35Sale/Maturity of Investment177.4780.35393.562,126.89915.95Purchase of Investments-62.80.0-48.66-1,772.65-1,353.34Other Investing Cash Flow-2.81-2.34-24.07-1.56-0.

14Cash from Investing Activities27.61-49.0777.27102.27-651.12      Financing Cash Flow Items6.071.40.696.1619.43Other Financing Cash Flow6.071.40.696.1619.43Total Cash Dividends Paid-183.17-82.99-82.39-80.8-61.52Issuance (Retirement) of Stock, Net-226.848.80.37-437.42-125.67Issuance (Retirement) of Debt, Net-32.59-47.0272.82-1.91-1.0Cash from Financing Activities-436.53-119.81-8.51-513.97-168.76      Foreign Exchange Effects1.393.03-14.793.36-0.18Net Change in Cash-26.37220.62357.2856.32-70.79            Net Cash - Beginning Balance693.96473.34116.0659.74130.

53Net Cash - Ending Balance667.59693.96473.34116.0659.74APPENDIX 4: KEY FINANCIAL STATEMENT RATIOSKEY FINANCIAL STATEMENT RATIOSAll Amounts in US Dollars except ratios and percentagesTHIS YEAR (2011)LAST YEAR (2010)IndustryAmountsAnswerAmountsAnswerAverageLiquidity ratiosCurrent RatioCurrent Assets=1,174,410,000=3.01,167,030,000=2.92.4Current Liabilities387,840,000408,960,000Quick Ratio, orQuick Assets *819,470,0002.1785,710,0001.91.4"Acid Test"Current Liabilities387,840,000408,960,000* Quick assets include Cash, Marketable Securities, and Accounts Receivable (excludes Inventory)Asset Management RatiosInventoryCost of Goods Sold1,796,600,0006.

01,766,840,0005.45.0TurnoverInventory*301,210,000326,450,000Accts ReceivableSales2,967,560,000305.32,940,270,000298.278.2TurnoverAccts Receivable*9,720,0009,860,000* Textbooks generally use "average" for the year (beginning + ending) / 2, but its OK to use ending onlyDebt (Leverage) (Long-term Solvency) RatiosDebt toTotal Liabilities528,930,0000.3559,630,0000.3-AssetsTotal Assets1,880,000,0002,138,150,000Debt toTotal Liabilities528,930,0000.4559,630,0000.41.1EquityTotal Equity1,351,070,0001,578,520,000Times interestEBIT*316,010,000-309,450,000-78.

8EarnedInterest expense--* EBIT means "Earnings before Interest and Taxes"Profitability Ratios (not applicable if net loss)Net ProfitNet Income140,650,0004.7%169,020,0005.7%6.9%Margin (%)Sales2,967,560,0002,940,270,000Gross ProfitGross Profit1,170,960,00039.5%1,173,430,00039.9%40.3%on Sales (%)Sales2,967,560,0002,940,270,000ReturnNet Operating Income316,010,00064.9%309,450,00058.6%11.8%on Assets (%)Total Operating Assets487,240,000527,740,000aka ROIReturnNet Income140,650,00010.4%169,020,00010.7%30.0%on Equity (%)Total Equity1,351,070,0001,578,520,000Market Value RatiosEarnings perNet Income140,650,0000.

7169,020,0000.8Industry avg.Share (EPS)No. shares outstanding194,370,000206,830,000not relevantPrice/Earnings*Market Price12.5411.72prior year not required16.8Ratio (P/E)EPS1.07* P/E ratio changes daily with market price. If EPS is negative, ratio is "not applicable". Use "Basic" , not "Diluted".*Basic Normalized EPS has been used for computation of P/E ratio and has been extracted from the 2011 Income Statement and the Market Price pertaining to October 20, 2011 has been taken into account, source: MSN Money, 2011.

ReferencesAmerican Eagle Outfitters, Inc. Annual report and Financial Data Retrieved October 20, 2011 from http://moneycentral.msn.com