FINANCIAL STATEMENT ANALYSIS Assignment Example | Topics and Well Written Essays - 250 words

FINANCIAL STATEMENT ANALYSIS - Assignment Example The first store to be opened globally was in Middle East in Dubai. (i) Current Ratio: The current ratio signifies a company’s ability to pay off its short term obligations that is the ability to cover up short-term liabilities (debt and payables) with short-term assets (cash, inventory and receivables). The higher the current ratio, the higher the ability of the firm to payoff short-term obligations but it can also depict inefficiency in handling illiquid assets such as inventory. AEO depicts a favorable trend in terms of this ratio as it has elevated from 2.9 in 2010 to 3.0 in 2011. In contrast with the industry average, the company has performed quite well. But such a high current ratio can also show inefficiency in handling illiquid assets such as inventory but this cannot be determined without the help of Quick ratio. (ii) Accounts Receivable Turnover: This ratio talks about the management efficiency of a firm in collecting cash from debtors who were sold goods on credit by the firm; the ratio is computed in times and shows how many times a firm generates and collects cash from debtors in a year. The higher the turnover, the more the efficient the firm is but this would also depict an aggressive or tightened credit policy and can lead to lesser sales generation. American Eagle Outfitters’ trend of Accounts receivable turnover is favorable as it has increased from 2010 to 2011. This compared to the industry shows a way higher ratio and depicts that it operates a very aggressive credit policy. (iii) Inventory Turnover: This ratio again comes under management efficiency of a company and depicts that how many times a year the inventory had been sold for cash and re-stocked; the higher the turnover the more efficient the management of the firm is. The trend of this ratio is favorable for American Eagle as it has increased in the two years