Unit 7 DB quest

Pick a publicly traded company from the list below and review their annual report.

Select a company from the following list.SMALL CAP Companies – List of Small-Cap Stocks ($300M – $2B Market Cap) – Stock AnalysisMID CAP Companies – List of Mid-Cap Stocks ($2B – $10B Market Cap) – Stock Analysis

If someone were to ask you if the company is doing well, what are 5 data points you would use within the report to judge? What do those data points tell you? Please do not repeat companies that have been used by your peers in their initial posts.

In response to your peers, is there other data you would want to include?

CLAASMATE 1
The first data points I would assess are in line with the financial performance of the company. This
would be the starting point for every company, regardless of their business model (Kenton, 2023).
Revenue and revenue growth tell you whether the company is growing, shrinking, or stagnating,
which is important for predicting if the company will be healthy in the future. Then, I would look at
either net income or EBIT, depending on the situation. Both can give you a sense of how much of the
revenue the company actually retains, indicating whether the company is profitable and how
efficient it is in generating profit. It might be wise to also look at cash flows in that regard, to doublecheck if the company is not only making money on the books but also generating cash.
I chose to analyze Abercrombie & Fitch (A&F), which we should all know from the hype in the early
2010s. When looking at the revenue, A&F has shown fluctuating growth over the last five years with
an overall positive trend. The growth rates range from -13.7% to 18.8%, with an overall growth from
2019 to 2023 of 18.1% (Abercrombie & Fitch Co., n.d.-a; Abercrombie & Fitch Co., n.d.-b). This
indicates that while revenues fluctuate year on year, an overall positive growth trend is visible,
suggesting that A&F is growing and will continue to grow in the near future. Moreover, the current
net income is positive at $335 million (Abercrombie & Fitch Co., n.d.-a), showing that the company is
profitable. Additionally, the profit margin is 8%, indicating that A&F retains 8 cents for every dollar
they make (Abercrombie & Fitch Co., n.d.-a), which is a healthy level in the clothing industry where
profit margins range from 4% to 13% (Sable, 2019). Lastly, operating cash flow is positive at $653
million, showing that A&F not only makes money on the books but also generates cash with its
operations (Abercrombie & Fitch Co., n.d.-a). To give an interim conclusion, A&F is currently
profitable with stable margins and shows growth, indicating that the company makes money right
now and is likely to generate profits in the near future
The second category I would examine is the company’s debt and its ability to repay it. The ratio
between debt and equity, for example, can indicate how risky a company’s financing is (Kenton,
2023). More debt means that in tougher times, when money gets tight, the company is more likely to
be unable to meet its obligations, potentially leading to bankruptcy. This is a measure of the
company’s long-term solvency. First, I would look at the current ratio, which is the ratio between
current assets (highly liquid) and current liabilities (liabilities due in the short term). This ratio
indicates if the company is solvent in the short term. Next, I would examine the leverage ratio, which
is the ratio between debt and equity. This ratio indicates how risky the company’s overall financing is
and whether it could sustain through tougher times.
A&F has a current ratio of 1.6, with current assets being $1.5 billion and current liabilities $966
million (Abercrombie & Fitch Co., n.d.-a). This is a healthy level and indicates that A&F can pay its
short-term debt obligations even if it experiences one or two bad years. Additionally, A&F is
leveraged at a healthy level, with a debt-to-equity ratio of 1.8, meaning that A&F’s business is
financed two-thirds by debt and one-third by equity (Abercrombie & Fitch Co., n.d.-a). This is normal
and reasonable, enabling A&F to pay its debt obligations even during recessions. Combined, these
metrics show that A&F can meet its short-term obligations and is not excessively risky in terms of
long-term financing.
The last category I would look at includes company-specific measures. Since every company and
every industry has different business models, it is important to examine data points that are
relevant to the company and its business model. For example, for retailers, inventory levels might be
very important, while for platforms like Meta, the number of users on their social networks and the
growth rate of these users might be more relevant.
For the business model of A&F, being a fashion retailer, inventory levels and related measures are
particularly important. To achieve a sufficient analysis, I will first look at inventory levels and how
they have changed over time. Then, I would examine the inventory turnover ratio, which measures
how many times inventory is sold over a certain period, indicating the efficiency of inventory use
(CFI, n.d.). However, since A&F doesn’t publish average inventory levels for the year, which are
essential for calculating the inventory turnover ratio, the ratio of sales volume to inventory will be
used as a proxy. Currently, inventories are $469 million, which accounts for roughly 11% of the total
sales volume of the year (Abercrombie & Fitch Co., n.d.-a). Compared to last year, when more
inventory was kept despite having a lower sales volume (roughly 14% inventory compared to yearly
sales volume), this shows that A&F has sold inventory and might be operating more efficiently now.
Keeping inventories at healthy levels is important; high levels of inventory indicate that items aren’t
selling and are associated with high overhead costs. However, a minimum level of inventory must be
kept to operate most efficiently when unexpected demand arises or supply chain disruptions occur.
All in all, the financial statements show that A&F is currently operating a profitable business that is
experiencing consistent growth. A&F can pay its short-term liabilities and is financed with a healthy
amount of risk exposure. Lastly, A&F has increased its operating efficiency through more effective
use of their inventories. This analysis concludes that A&F is a healthy business, as far as one can tell
from the financial statements.
Regards,
Jannek
References:
Abercrombie & Fitch Co. (n.d. -a). Annual Report 2023. Abercrombie & Fitch
Co. https://abercrombieandfitchcompany.gcs-web.com/static-files/9e3fcfa0-83bc-456a-9e45f2fe335e7dff
Abercrombie & Fitch Co. (n.d. -b). Annual Report 2021. Abercrombie & Fitch
Co. https://abercrombieandfitchcompany.gcs-web.com/static-files/e0d759b9-031d-4371-b4c338b440b13a7f
CFI. (n.d.). Inventory Turnover Ratio. CFI. Date Retrieved: 2024, June
9. https://corporatefinanceinstitute.com/resources/accounting/inventory-turnoverratio/#:~:text=The%20inventory%20turnover%20ratio%20formula,inventory%20levels%20compared
%20to%20sales.
Kenton, W. (2023, Oct 25). Financial Performance: Definition, How it Works, and Example. Investopedia.
Date Retrieved: 2024, June 9. https://www.investopedia.com/terms/f/financialperformance.asp
Sable, J. (2019, Mar 12). What is the Profit Margin for the Retail Clothes?. Chron. Date Retrieved:
2024, June 9. https://smallbusiness.chron.com/profit-margin-retail-clothes-25123.html
CLASSMATE 2
Hello class, hello professor,
An annual report is a highly summarized form of describing a company’s financial performance and
activities. From the key figures contained in an annual report, statements can be made about the
risk appetite, the “health” and the operations of a company (Arjun Remesh, 2024). The annual report
is made up of the following key individual reports: The Balance Sheet, the Income Statement, the
Cash Flow Statement and the Notes (Sushant Deoskar, 2024)
I would like to use the following company to analyze the Annual Report: Penske Automotive Group,
Inc (PAG) Penske Automotive Group (PAG) Cash Flow Statement – Stock Analysis
Analysis of absolute key figures (Stock Analysis, 2024):
A) Net Cash Flow
The cash flow is made up of the operating cash flow, the investment cash flow and the financing
cash flow. Penske’s operating cash flow is positive, albeit 25% lower than in the previous year, which
must be viewed critically. Due to the high investments and financing of Penske, the cash flow is
burdened accordingly. As a result, the company’s total cash flow is USD -10.1 million. This is of
course very bad, as there is a risk of insolvency if this happens again in the coming year.
B) Net cash as part of shareholders equity
If you look at the company’s balance sheet, you can see that the company has a high proportion of
liabilities. These were financed by taking on debt, which can be inferred from the high proportion of
net debt from shareholders’ equity.
Benefits of ratios (Stock Analysis, 2024):
Ratios have the advantage of being able to compare two absolute values with each other and thus to
make statements and comparisons between companies from different sectors and with different
sizes. Therefore, three further ratios are now used for the analysis
C) Dept/Equity Ratio
The debt/equity ratio puts the company’s debt in relation to its equity. The value in 2023 is 1.65. A
value of 100% (1.0) or more is considered high risk. 1.65 therefore corresponds to a very high debtequity ratio. The trend over the last few years is also rising, which indicates a structural problem at
the company.
D) PE Ratio (Price to Earnings Ratio)
The PE ratio compares the price of a company share with the earnings per share. At Penske, this
ratio is 10.34 in 2023 and 7.07 in 2021. This means that the price of a share has risen significantly
more in relation to earnings, which also indicates a structural problem in the generation of profits
due to the long observation period.
E) EV/sales ratio (enterprise value to sales ratio)
The value of a company is set in relation to the sales it generates. The value has remained almost
constant at around 0.6 over the last 4 years at Penske. Values below 1.0 are usually regarded as a
low value, but this does not automatically indicate a poor value. It merely means that a relatively low
enterprise value generates a relatively high turnover.
Based on the data points mentioned, I would assess the overall situation of the company rather
negatively, as many values in the areas of profit generation, return, enterprise value and cash flow
are clearly too negative compared to the usual comparative values.
Thanks for the discussion and best Regards
Jonas Heimsch
References:
Arjun Remesh (2024). Strike Money – Annual Report Analysis: Definition, Components, Example, How
to Do, Uses. https://www.strike.money/fundamental-analysis/annual-report-analysis
Sushant Deoskar (2024). Wall Street Mojo – Annual Report. https://www.wallstreetmojo.com/annualreport/
Stock Analysis (2024). Penske Automotive Group, Inc.
(PAG). https://stockanalysis.com/stocks/pag/financials/ratios/