Cash Flows and Financial Analysis

Cash Flows and Financial Analysis

Established in 1977, American Eagle Outfitters (AEO) is a worldwide firm based in the United States. The business, often known as American Eagle, is well-known for its apparel labels. In 2006, American Eagle Outfitters Inc. was listed on the New York Exchange. Among its most well-known offerings is Aerie, which provides young ladies with a friendly and secure environment where they can buy form-fitting clothing, including bras and underwear. American Eagle Outfitters Inc. has over a thousand locations in the US, Canada, Mexico, and Hong Kong. For this unit, the overall company analysis is done. Notably, this is done by undertaking a financial ratio analysis. Further, a trend analysis offers insight into the company’s performance over time. The financial ratios are calculated and presented in an Excel workbook. However, a table from the Excel workbook is presented in this paper as an overview of the discussed ratio and its implications for the company’s performance.

Financial Analysis

Table 1:

Financial Ratios

The table above shows the financial performance of American Eagle Outfitters Inc. regarding financial ratios and trend analysis. The figures calculated in the ratios give insight into the company’s performance. When the figures are compared between 2019 and 2020, it becomes a trend analysis that evaluates the company’s performance change across the two years. Significant findings established from the calculations are discussed. The findings relate to the company’s activity, solvency, liquidity, and profitability. Regarding activity, the company’s inventory turnover improved from 2019 to 2020. The higher the ratio in the clothing retail industry, the better for a company. Although this indicates good financial performance, the company can enhance the inventory turnover further by improving the efficiency of making sales. A declining trend is observed considering the activity element from the asset turnover perspective. The asset turnover ratio declined across the two years from 0.14 to 0.06, a significant drop. Essentially, it points to a decline in the efficiency with which assets are utilized to raise revenue for the company. Since this is a significant drop, there is a need for a drastic change in asset management to raise revenue.

Another part of the financial statement analysis is liquidity. It evaluates a company’s financial health regarding the ability to pay its maturing obligations. The current and quick ratios calculated above offer insight into the liquidity position of American Eagle Outfitters Inc. For the current ratio, a trend of declining performance is observed: the value of the ratio reduced from 1.93 to 1.39 across 2019 and 2020. Notably, this shows that the company’s ability to pay its current liabilities using current assets is reduced, which is a significant aspect to consider. If the trend continues, the company may fail to meet its maturing obligations and become solvent. When industry aspects are considered, the performance by American Eagle Outfitters Inc. is below average because an industry average for the current ratio falls around 2. Thus, improvement mechanisms should be adopted by the company. On the other hand, a similar trend as in the case of the current ratio is observed with the quick ratio. The ratio reduced across the two years. The ratio offers insight into the possibility of the company’s inventory being devalued and whether the company can meet its maturing current obligations without selling inventory. The analysis shows that the company cannot meet all its current liabilities without selling inventory in 2020, compared to 2019, when that could happen. Essentially, this highlights the declining financial health of the company.

The financial analysis also evaluates the company’s solvency using the debt-to-asset and return-on-equity ratios. The debt-to-asset ratio highlights the company’s utilization of debt to finance assets. From the analysis, the value of the ratio recorded an increasing trend across the two years. The ratio increased from 0.32 to 0.63 in the covered period. Essentially, this means that the company’s performance reduced across the two years. This is so because the industry considers a debt-to-asset ratio of 0.5 and below good. Thus, the observed trend threatens the company is solvency if it continues. Further, a similar trend is observed with the return on equity ratio. The ratio declined from 0.20 in 2019 to 0.15 in 2020. Generally, the higher the return on equity ratio, the more efficient an organization generates revenue while utilizing equity. With the decline observed, there is a need for the company to take steps toward improving, lest investors are likely to consider it a risky venture.

The last element of the financial analysis covered above is profitability. The evaluation looks at how the company performs regarding the generation of profits for its shareholders. The gross profit margin and return on asset ratios are considered in this case. The gross margin evaluates the company’s financial performance regarding the generation of profits from selling activities. In contrast, the return on assets ratio evaluates the company’s performance regarding the utilization of assets to generate profits. The calculations show a trend of reducing profitability with the gross profit margin. The value of the ratio decreased from 37% to 35% across the two years considered. The reduction is directly attributable to an increase in the costs of sales relative to the increase in total sales across the two years considered. Notably, this is a significant aspect of the financial analysis that the company should address because an increase in total sales should attract a higher gross margin.

A declining trend is still observed when the return on assets is considered. The value of the ratio declined from 0.14 to 0.06 across the two years. The retail clothing industry prefers a return on assets ratio of above ten. Thus, this is a significant decline, which indicates poor financial performance for American Eagle Outfitters Inc. The decline implies the company is not utilizing its assets efficiently to generate profits. The decline can also be associated with acquiring a significant level of assets and property for the year 2020. There is a need to improve the efficiency with which assets are utilized to generate profitability.

Discussion of the Findings

The financial evaluation above shows that American Eagle Outfitters Inc.’s financial performance declined over the two years. A trend of declining performance is observed across almost all the calculated metrics. Notably, this is a significant observation for any financial analyst and all company stakeholders. An improvement was only recorded when the inventory turnover was considered, which cannot be used single-handedly to claim that the company is performing well. At some point, the company performed below the retail clothing industry averages. Based on the analysis, American Eagle Outfitters Inc. should adopt measures to enhance financial performance. However, there is one valid explanation to justify the performance of the company. During the fiscal period of 2020, the influx of COVID-19 affected the clothing industry significantly. Most of the products sold by the company lost demand while most of its outlets remained closed. It was not the only firm that was affected. Almost every other company was significantly hurt; thus, the performance achieved could be considered exceptional. With the pandemic curbed, better performance can be sought, and investors have every reason to believe that the company will perform well.

Conclusion

American Eagle Outfitters Inc.’s financial statement evaluation conducted above indicates a decline in financial performance between 2019 and 2020. The trend analysis undertaken records a decline in almost all the financial ratios calculated for the two years. The decline can be interpreted as deteriorating financial health that requires emergent action to avoid imminent consequences of poor performance. The liquidity, solvency, and profitability analyses indicate a significant drop in the financial performance. A positive performance that is not significant is only observed under activity analysis. Even though there was a poor performance for the period analyzed, the company’s performance is justified as good. Notably, this is so because the COVID-19 pandemic significantly hurt the retail clothing industry. The company remained strong in reporting the financial results of 2020 as many industry participants failed. Thus, the performance of the company should be suitable for all stakeholders.

Reference

American Eagle Outfitters, Inc. (2020). Annual report. https://www.sec.gov/Archives/edgar/data/919012/000156459020010469/aeo-10k_

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This IP builds upon your work in all previous units.

In this project, you have been analyzing and interpreting the publicly traded company, American Eagle Outfitters, Inc. (located in Appendix A: American Eagle Outfitters, Inc., 2020 Annual Report of the required textbook: Financial Accounting).

Cash Flows and Financial Analysis

• Unit 1: Industry and Business Structure
• Unit 2: Current Asset Analysis
• Unit 3: Inventory and Long-Term Asset Analysis
• Unit 4: Long-Term Liabilities and Equity
• Unit 5: Overall Company Analysis and Conclusion

All of the information has been gathered to complete a comprehensive financial analysis of the company’s financial health and internal financial measures to develop short- and long-term strategic plans to help a manager make good business decisions.

Deliverable Requirements: Your comprehensive financial analysis should have at least 5 pages and present industry findings regarding liabilities and equity. Be sure to address the questions above, and consider how to use this information in your analysis. Your analysis should include the following:

• Present the financial analysis separately.
• The trend analysis and ratios for the company should be presented in an Excel workbook.
• In 4 to 6 double-spaced paragraphs, discuss the significant findings for the company.
• Do not discuss the financial analysis line by line; instead, identify the significant findings.
• Discuss the meaning of the findings.