The following information was reported by Gap, Inc. in its 2010 annual report. D
ID: 2469662 • Letter: T
Question
The following information was reported by Gap, Inc. in its 2010 annual report. Determine the overall percentage decrease in Gaps total assets from 2006 to 2010. What was the average decrease per year? Comment on the change in Gap's liquidity. Does working capital or the current ratio appear to provide a better indication of Gap's liquidity? What might explain the change in Gap's liquidity during this period? Comment on the change in Gap's solvency during this period. Comment on the change in Gap's profitability during this period. How might this affect your prediction about Gap's future profitability?Explanation / Answer
2010 2009 2008 2007 2006 Total Asset (million $) 7065 7985 7564 7838 8544 Working Capital (million $) 1831 2533 1847 1653 2757 Current Ratio 1.87:1 2.19:1 1.86:1 1.68:1 2.21 :1 Debt to Asset Ratio 0.42:1 0.39:1 0.42:1 0.45:1 0.39:1 Earning per share 1.89 1.59 1.35 1.05 0.94 a) Decrease in total Asset 1479 559 980 706 (Base Year 2006) % Decrease in Asset 17.3% 6.5% 11.5% 8.3% Overall decrease in total asset is 17.3% from Year 2006 to year 2010. Year to Year Decrease in Total Asset 920 -421 274 706 YOY % Decrease in Asset 11.5% -5.6% 3.5% 8.3% b) Comment on Liquidity Current ratio of the company is best in year 2006, and its comes down on yoy basis. Expect there is a improvement in year 2009. Decrease in the current ratio means companys liquidity condition is also starting to fell down. Working Capital of the company is also starting to reduce, this means there is increase in current liability or decrease in current asset. This also indicate that company liquidity is also starting to come down. In year 2006 million $ 2757 to comes down in year 2010 to million $ 1831. One better indication in this that company starting utilize the fund well. Decrease in Working Capital 926 224 910 1104 (Base Year 2006) % Decrease in Asset 33.6% 8.1% 33.0% 40.0% Overall decrease in working capital requirement is by 33.6% from Year 2006 to year 2010. c) Comment on the solvency' Debt to asset ratio is increased from 0.39 :1 in year 2006 to 0.42:1 in year 2010. This means there is increase in the liablity of the company from the year 2006. IT means there is a pressure on the company's solvency situation. But still it is in a very control condition of the solvency of the company. d) Comment on Profitability Change in EPS 0.95 0.65 0.41 0.11 (base year 2006) % of Increase in EPS 101.1% 69.1% 43.6% 11.7% EPS of the company increase by 101.1% in year 2010 from the year 2006. In term of earning , company is really doing well and grow consitanty and rapidly. This is a good thing for the shareholder.
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