Business appliCation- Two of the largest chains of grocery stores in the United States are the Gap, Inc., andAbercrombie & Fitch Co. In fiscal 2011, The 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 profit- able, 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.14
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Gap
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Abercrombie & Fitch*
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Net sales
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$14,549
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$4,158
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|
Beginning total assets
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7,065
|
2,941
|
|
Ending total assets
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7,422
|
3,048
|
|
Beginning total liabilities
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2,985
|
1,051
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|
Ending total liabilities
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4,667
|
1,186
|
|
Beginning stockholders' equity
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4,080
|
1,891
|
|
Ending stockholders' equity
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2,755
|
1,862
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* Abercrombie & Fitch's data is rounded to the nearest dollar.
1. 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.)
2. What do the ratios tell you about the factors that go into achieving an adequate return on assets in the clothing store industry? For industry data, refer to the graphs in the ratio boxes throughout the chapter.
3. How would you characterize the use of debt financing in the clothing store industry and the use of debt by these two companies?