Reebok & La Gear Analysis of Two Very Different Companies
Walter Garcia Brooks
Date: 10/5/2012
Reebok & LA Gear Analysis of two very different companies 1. Looking at both companies Return on Equity is pretty comparable between the two in 1990. However, we can see that LA Gear had a much better performance in the previous two years with a precipitous RoE in 1990 as compared to the previous two years. Reebok on the other had has reported a stable RoE in the last three years.
Looking at the component ratios of RoE we can see some some differences why LA Gear has had a huge drop on RoE lately.
The three components of RoE are illustrated below:
Profit Margin
Cost control
Pricing
Asset Turnover Ratio
Asset utilization
Financial Leverage Ratio For example, Profit Margin, which is a ratio that provides information in regards to cost control and pricing revels a very disturbing difference: for example in 1988 and 1989 LA Gear had a profit margin of 10% and 9% respectively but in 1990 it dropped to only 3%. Clearly the high RoE reported at 17% in 1990 did not come high profits. On the other hand, Reebok’s profit margin has had a 8%, 10% and dropping back to 8%, a much stable trend but nonetheless, it does not explains the high margin of RoE on both companies. Ratio # | Financial Ratio | Reebok '90 | Reebok '89 | Reebok '88 | LA Gear '90 | LA Gear '89 | LA Gear '88 | 1 | Return on Equity | 19% | 23% | 21% | 17% | 53% | 69% | 2 | Profit Margin | 8% | 10% | 8% | 3% | 9% | 10% | 3 | Gross Margin | 40% | 41% | 37% | 34% | 42% | 42% | 4 | Total Asset Turnover | 1.68 | 1.63 | 1.85 | 2.86 | 3.12 | 2.70 | 5 | A / R Turnover | 6.34 | 6.37 | 7.16 | 7.03 | 8.24 | 6.93 | 6 | Inventory Turnover Ratio | 4.00 | 3.64 | 3.93 | 3.94 | 3.48 | 3.14 | 7 | Debt to Equity Ratio | 0.41 | 0.38 | 0.54 | 0.77 | 0.59 | 2.12 | 8 | Current Ratio | 3.51 | 3.86 | ---- | 2.14 | 2.62 | ---- | 9 | Quick Ratio | 2.11 | 2.27 | ---- | 1.01 | 1.02 | ---- | 10 | Times Interest Earned | 16.60 | 19.64 | 17.35 | 3.77 | 8.47
Date: 10/5/2012
Reebok & LA Gear Analysis of two very different companies 1. Looking at both companies Return on Equity is pretty comparable between the two in 1990. However, we can see that LA Gear had a much better performance in the previous two years with a precipitous RoE in 1990 as compared to the previous two years. Reebok on the other had has reported a stable RoE in the last three years.
Looking at the component ratios of RoE we can see some some differences why LA Gear has had a huge drop on RoE lately.
The three components of RoE are illustrated below:
Profit Margin
Cost control
Pricing
Asset Turnover Ratio
Asset utilization
Financial Leverage Ratio For example, Profit Margin, which is a ratio that provides information in regards to cost control and pricing revels a very disturbing difference: for example in 1988 and 1989 LA Gear had a profit margin of 10% and 9% respectively but in 1990 it dropped to only 3%. Clearly the high RoE reported at 17% in 1990 did not come high profits. On the other hand, Reebok’s profit margin has had a 8%, 10% and dropping back to 8%, a much stable trend but nonetheless, it does not explains the high margin of RoE on both companies. Ratio # | Financial Ratio | Reebok '90 | Reebok '89 | Reebok '88 | LA Gear '90 | LA Gear '89 | LA Gear '88 | 1 | Return on Equity | 19% | 23% | 21% | 17% | 53% | 69% | 2 | Profit Margin | 8% | 10% | 8% | 3% | 9% | 10% | 3 | Gross Margin | 40% | 41% | 37% | 34% | 42% | 42% | 4 | Total Asset Turnover | 1.68 | 1.63 | 1.85 | 2.86 | 3.12 | 2.70 | 5 | A / R Turnover | 6.34 | 6.37 | 7.16 | 7.03 | 8.24 | 6.93 | 6 | Inventory Turnover Ratio | 4.00 | 3.64 | 3.93 | 3.94 | 3.48 | 3.14 | 7 | Debt to Equity Ratio | 0.41 | 0.38 | 0.54 | 0.77 | 0.59 | 2.12 | 8 | Current Ratio | 3.51 | 3.86 | ---- | 2.14 | 2.62 | ---- | 9 | Quick Ratio | 2.11 | 2.27 | ---- | 1.01 | 1.02 | ---- | 10 | Times Interest Earned | 16.60 | 19.64 | 17.35 | 3.77 | 8.47