Financal Statement Analysis Essay Example | Topics and Well Written Essays - 2000 words

Financal Statement Analysis - Essay Example Consequent to this, the share price movements of Inditex SA and Gap Inc over the past one year are analysed, following which the impact of credit crunch on both the retail firms are discussed. It also confers on their corporate governance issues in detail. Finally, the paper offers recommendations for both Inditex SA and Gap Inc with the purpose of improving their financial as well as operational situation in the upcoming years. Corporate Failure Models for Inditex SA and Gap Inc The findings from the previously conducted financial statement analysis of Inditex SA and Gap Inc suggest that both the companies are financially stable and fit. However, though the present financial position of both the retail companies is stable in comparison to the overall retail industry, it is imperative to assess the susceptibility of these companies to corporate failure or bankruptcy. This can be accomplished by computing the Altman’s Z-score of Inditex and Gap. This is because the Z-scores of the business organizations enable one to forecast the extent of financial distress encountered by the business. It also assists in assessing whether a particular organization is vulnerable to bankruptcy in the upcoming years. ... (Rachlin, 1997). In the above equation, Working Capital/Total Assets ratio determines the net value of liquid assets of the organization in relation to its total assets, while the Retained Earnings/Total Assets gauges the profitability of the organization over time. The EBIT/ Total Assets ratio is the most vital constituent of the equation as it determines the earning capacity of the company. The Market Value of Equity/Total Liabilities ratio determines the organization’s potential to endure a decline in its asset value, where as Net Sales/Total Assets ratio identifies the sales generating competence of the organization’s assets (Rachlin, 1997). The Z-score of Inditex SA and Gap Inc have been computed as follows: Financial Year 2011 Inditex SA (in millions Euro) Gap Inc (in millions US$) Current Assets 5202.51 3926 Total assets 9826.08 7065 Net Sales 12526 14664 Interest 3.56 0 Total Liabilities 3402.91 2985 Current Liabilities 2674.91 2095 Market Value of Equity 42105. 97 14212.29 Earnings before Taxes 2321.59 1982 Retained earnings 6272.3 1086 (Source: Gap Inc., 2011; Bloomberg (a), 2012; Bloomberg (b), 2012) Z-Score of Inditex SA Z= 1.2*(0.257) + 1.4*(0.638) + 3.3*(0.237) + 0.6*(12.374) + 1.0*(1.275) = 10.682. The elevated value of Z-score for Inditex is mainly due to the high value of Market Value of Equity to Total Liabilities ratio of the company. The company has much less liabilities in comparison to its large market capitalization value. Z-Score of Gap Inc Z= 1.2*(0.259) + 1.4*(0.154) + 3.3*(0.281) + 0.6*(4.761) + 1.0*(2.076) = 6.387. The decent z-score for Gap Inc is mainly due to the high value of Market Value of Equity to Total Liabilities and the