Solvency is described as the company’s ability to meet its long-term financial obligations. A company which is insolvent often enters bankruptcy. When investors are looking where to invest their money, they can use ratios to analyse the company. Using solvency ratios they can find debt to equity, interest coverage, and debt to assets ratios.
• Debt to Equity ratioThe debt to equity ratio is calculated by dividing a company’s total liabilities by total shareholders’ equity. It indicates how much debt company is using to finance its assets relative to the value of shareholders’ equity. The optimal D/E ratio varies widely by industry, but the general consensus is that it should be between 0.3 and 0.6.
Abercrombie&Fitch debt to equity ratio in 2014 was 0.64, in 2015 D/E ratio was 0.80, and in 2016 was 0.
88. Whereas competitors American Eagle Outfitters debt to equity in 2016* was 0.53. To conclude these results, Abercrombie&Fitch has higher D/E ratio than its competitor’s. To conclude these results, American Eagle Outfitters has better D/E ratio than our selected company.• Interest coverage ratioThe interest coverage ratio is used to determine how easily a company can pay interest on its outstanding debt. This ratio is calculated by dividing EBIT (earnings before interest and taxes) by interest expense.
Analysts prefer to see interest coverage ratio 3 or better, but it also depends on the industry company is in. Abercrombie interest coverage in 2014 was 10.7, in 2015—7.9 and in 2016 was 3.99. According to these ratios Abercrombie company is “too safe” and is not using opportunities to magnify earnings through leverage.
• Debt to Assets ratioThis ratio defines the total amount of debt relative to assets. It is calculated by dividing total liabilities by total assets. The higher the ratio, the higher degree of leverage and financial risk company has.
Lower ratios are considered as better (0.4 or lower). Abercrombie debt to assets ratio in 2014 was 0.
39, in 2015—0.45, and in 2016 was 0.47. Whereas competitor’s debt to assets ratio in 2016* was 0.35. To conclude these results our selected company have some issues with this ratio because it is too high. And comparing with competitors’ ratio, Abercrombie has higher degree of debt financing.
*In this analysis all company’s solvency ratios will be compared with competitor’s (American Eagle Outfitters) ratios.Analysis of shares price chart of Abercrombie the last 5 years selected company had some growths and some falls in shares. In 2013 shares were rising evenly, but a big fall in price which happened in August, 2013 caused shares to end up by a 31% decrease in the end of the year. In 2014 the same thing happened—gradually increase in shares price followed until August, after which the price in shares fell down and the year ended with 13% nominal and 40% real decrease.
In 2015 steady negative growth followed causing 11% nominal decrease and 46% real decrease in the shares price of the company. Despite the fact that in the beginning of the year growth rate was progressively increasing, in 2016 shares price fell down by even more—54% nominal and 75% real from January, 2013. This year is ending with the company’s growth in shares price of 46% positive growth counting from the beginning of this year, and 64% negative growth looking from the January 2013. In conclusion, in the five year term company had steady decrease in shares price comparing it from the beginning of term until now. To summarise annual financial analysis of Abercrombie&Fitch company, it is clear that investing in this company could be risky. According to financial ratios which was analysed before, company have to change its marketing strategy to gain profits also have to use all of it’s resources and opportunities in the right way.
