Financial ratio’s / accounting ratio’s are best described as being “the relative magnitude of two or more selected numerical values taken from an enterprise’s financial statements (Libby, Libby, Libby & Short, 2011),” in order to evaluate the overall financial condition of a business. Whether they are viewed by stakeholders within a firm, or current and potential stakeholders outside of the enterprise, financial ratios can used to compare the strength of a company against its own performance objectives, or in comparison to those of its leading competitors within the industry. In this paper, we compare Urban Outfitters and American Eagle against each other as well as against the industry standard. The main categories of ratios used for comparison are used to determine liquidity, efficiency, financial, profitability and dividend. The finacial ratios will be used to compare the operational performance of two companies within the clothing industry. Urban Outfitters and American Eagle Outfitters are both well known but the ratios will help make the final determination of which company is in a better financial situation. Current Ratio & Liquidity
Liquidity ratios, such as the current, quick, and cash ratios provide insight into a firm’s ability to pay back its short-term liabilities (debts and payables) with its short-term assets (with cash, inventory, and receivables). For example, the current ratio tells you “how much in assets a company has in comparison to its liabilities” (Stocks Simplified, n.d.). The higher the ratio, the more a company is generally considered to be capable of paying off its obligations, if they came due at that particular point in time. In looking at the current ratio comparisons below, it can readily be seen that for the fiscal year in review, Urban Outfitters is in a far better position to quickly turn its assets into cash if they had to. Note that Urban Outfitters’ current ratio exceeds not only American Eagle, but that of the industry average as well. Current Ratio (Industry Average = 2.6)
Urban Outfitters – 4.4
American Eagle – 2.3
* Please note that company with the desirable ratio will be highlighted in yellow through the paper. Inventory Ratio & Efficiency
Efficiency or asset turnover ratios can prove how effective a company has been in utilizing their current assets to create revenue. Receivable turnover, average collection period, and inventory turnover are all different types of efficiency ratios (Stocks Simplified, n.d.). We are more interested in the inventory ratio; with a low turnover being a sign of poor sales and excess inventory. A high ratio on the other hand, can imply either strong sales or if excessive in terms of the industry average - ineffective buying.
In looking at the comparative analysis chart for Urban Outfitters, American Eagle Outfitters, and the Industry Average below, it can be seen that for the period under review, that Urban Outfitters has once again bested American Eagle Outfitters in terms of the operational effectiveness of its inventory control system. Compared to American Eagle Outfitters 6.2 days and the Industry Average 5.9 days, Urban Outfitters sells and replaces its inventory every 6.6 days, a firm indication that the company seeks to quickly move inventory through its system, thereby avoiding the unnecessary cost and potential financial risk of maintaining high levels of stagnant inventory.
Inventory Turnover Ratio ( Industry Average = 5.9)
Urban Outfitters = 6.6
American Eagle = 6.2
Financial leverage ratios provide what can best be described as being “a long term outlook on a company’s ability to meet its financial obligations” (Stocks Simplified, n.d). The debt ratio, debt to equity ratio, and interest coverage ratio are all types of financial leverage ratios. Debt to Equity Ratio (Industry average = 1.1)