Gap is a close competitor of Deckers Outdoor and Wolverine in the teenage appare

Question

Gap is a close competitor of Deckers Outdoor and Wolverine in the teenage apparel industry. Gap also owns the Old Navy and Banana Republic clothing chains. Gap reported higher earnings than Deckers Outdoor and Wolverine in 2012. Does that mean Gap is more profitable? Maybe, but we need to control for differences in company size to accurately compare across companies. Selected financial data for The Gap is provided as follows: ($ in millions) 2012 2011 Sales $ 13,749 Net income 623 Total assets $ 6,067 $5,585 Total liabilities $ 3,867 $2,185 Stockholders' eq. $2,200 3,400 Total liabilities and stockholders' equity $6,067 $5,585 Shares outstanding (in millions) $405 Stock price $13 Calculate the return on equity for Gap in 2012. Calculate the return on the market value of equity for Gap in 2012. Calculate the price-earnings ratio for Gap in 2012.

Explanation / Answer

a) Return on Equity   = Net income / Average shareholders Equity

                                    = 623/2800 = 22.25%

b) Return on market value = 623/13*405          = 12%

c)PE ratio = 13*405/623    = $8.45

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