American Eagle vs. Urban Outfitters - Asset Essay Example

American Eagle Vs Urban Outfitters Introduction 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.

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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. 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 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. ). 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) Urban Outfitters = . 26 American Eagle = . 39 Calculated by dividing a firm’s total liabilities by its stockholders’ equity, the debt/equity ratio serves as an indication of the portion of equity and debt that the firm uses to finance its assets, in general, the lower the debt/equity ratio, the better.

As can be seen in the Debt/Equity comparison chart above, Urban Outfitters has the lowest Debt/Equity ratio of the three, which means that instead of having to use its scarce resources to pay back high levels of principal and interest on its long-term financial obligations, it can instead return a higher percentage of its revenue for the period to its shareholders. An action that rest assured will be reviewed very positively by stakeholders and investors in the company. Profit | Urban Outfitters| American Eagle| Industry Average| Profit margin| 10. 9%| 6. 0%| 3. 8%| Return on equity| 20. 9%| 13. 0%| 13. 1%| Earnings per share| $1. 02| $0. 7| N/A| Profitability ratios provide insight into how much profit a company generates with the money that shareholders have invested in the company. Profit margin, return on equity, and earnings per share are all forms of profitability ratios (Stocks Simplified, 2011). With its 10. 9% profit margin ration, Urban Outfitters is substantially more effective than American Eagle Outfitters at controlling its costs. Calculated as net income divided by revenue, or net profit divided by sales, “the profit margin ratio is a measurement of how much out of every dollar of sales a company actually keeps in earnings” (Stocks Simplified, 2011).

In this case, Urban Outfitters 10. 9% profit margin ratio means that the company has a net income of 10. 9 cents for each dollar of sales. A ratio that is far higher than that of American Eagle Outfitters, as well as the industry average. Urban Outfitters high profit margin ratio is also reflected in the firms higher than average return on equity, which is an overall measurement of the amount of net income that the company is able to return to its shareholders as a percentage of the equity that they invested in the company.

The firm’s high profit margin ratio is also reflected in the company’s ability to return a generous portion of its net income to its shareholders. With a generous offering of $1. 20 per share, against American Eagle Outfitters modest $0. 87 per share, Urban Outfitters would be the most attractive of the two firms, for both current and potential investors. Dividend Ratios The price/earnings ratio is a valuation of a company’s current share price compared to its per-share earnings. Sometimes referred to as the “multiple”, the price/earnings ratio illustrates “how much investors are willing to pay per dollar of earnings” (Investopedia, n. . ). In general, high price/earnings ratios suggest “investors are expecting higher earnings growth in the future compared to companies with a price/earnings ratios ” (Investopedia, n. d. ). Urban Outfitters listed price/earnings ratio of 23. 3, can be interpreted as meaning that an investor is willing to pay $23. 30 for each dollar of its current earnings, against a more modest $17. 20 for each dollar of investment in American Eagle Outfitters, and an even less $6. 80 for each dollar of investment in other firms in the same industry. Urban Outfitters| American Eagle| Industry Average| Price/Earnings| 23. 3| 17. 2| 6. 8| Dividend yield| 0%| 2. 7%| 2. 2%| Dividend yield is a financial ratio that shows how much a company pays out in dividends relative to its share price, as such an indicator, the dividend yield ratio “can be very helpful when looking for income producing stocks” (Stocks Simplified, n. d). For this period, American Eagle dividend yield surpassed that of Urban Outfitters, which for this period at least, makes American Eagle the unsurpassed “winner” in the dividend yield category.

Urban Outfitters is in a better financial position With the exception of the dividend yield ratio, it can clearly be seen by the data contained in the chart below, that for the period under review, the operational effectiveness of Urban Outfitters far exceeded that of American Eagle Outfitters. Out of all of the financial ratios that have been viewed, American Eagle Outfitters 2. 7% dividend yield ratio is the only ratio that surpassed that of Urban Outfitters 0% return for the period under review. Typically, mature profitable companies pay dividends.

However, the dividend yield ratio is one that must be viewed in conjunction with other financial ratios of a particular firm, in light of the fact that if a company thinks that its own growth opportunities are better than the investment opportunities available to shareholders elsewhere, the company might elect to keep its profits for reinvestment back into the business, rather than distributing them to its shareholders. | Urban Outfitters| American Eagle| Industry Average| Current ratio | 4. 4| 2. 3| 2. 6| Inventory turnover| 6. 6| 6. 2| 5. 9| Debt/Equity| 26%| 39%| 1. | Profit margin| 10. 9%| 6. 0%| 3. 8%| Return on equity| 20. 9%| 13. 0%| 13. 1%| Earnings per share| $1. 20| $0. 87| N/A| Price/Earnings| 23. 3| 17. 2| 6. 8| Dividend yield| n/a| 2. 7%| 2. 2%| In light of the fact that with the exception of its dividend yield, the financial ratios for Urban Outfitters far exceeded those of American Eagle Outfitters, Urban Outfitters is clearly in a better financial position than its competitor, and as such, is in a far better position to withstand the economic headwinds that companies in the clothing industry now face.

References: Investopedia. N. d. Price to earnings ratio. Retrieved on October 20, 2012 from http://ww. investopedia. com/terms/p/price-earningsratio. asp Investopedia. N. d. Why dividends matter. Retrieved on October 20, 2012 from http://ww. investopedia. com/articles/fundamental/03/102903. asp Libby, R. , Libby, P. A. , & Short, D. G. (2011). Financial Accounting (Vol. 7). New York: McGraw-Hill/Irwin. Stocks Simplified. N. d. Financial Ratios. Retrieved on October 20, 2012 from http://www. stocks-simplified. com/financial_ratios. html

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