Asset Recognition

Cash Liquidity

Cash Ratio

Figure 1: Cash Ratio for GPS and Competitors Source: FactSet

Upon reviewing the cash ratio data spanning the last five years for GAP Inc., Abercrombie, Urban Outfitters, and American Eagle, several insights emerge. A cash ratio exceeding 1 is typically deemed favorable, indicating sufficient cash reserves to cover current liabilities. Conversely, a ratio below 0.5 could signal risk, suggesting the company holds twice as much short-term debt as available cash.None of the companies consistently maintained a cash ratio above 1 throughout the period. Abercrombie comes closest to this benchmark, boasting ratios comfortably above 1 in 2020 and near 1 in other years. This implies a relatively robust capacity to cover short-term obligations, potentially appealing to investors. Additionally, Abercrombie may exhibit lower current debt levels, which bodes well for investor confidence.Conversely, Urban Outfitters and American Eagle consistently recorded cash ratios below 0.5 over the past three years, with notably lower figures in the most recent year and the last 12 months. This pattern suggests they may carry significantly higher short-term debt relative to available cash, raising concerns about their ability to meet immediate financial obligations.

Figure 2: Cash Ratio for GPS and Competitors (Graphed)Source: FactSet

Current Ratio

Figure 3: Current Ratio for GPS and Competitors Source: FactSet

GAP Inc., Abercrombie, Urban Outfitters, and American Eagle have consistently demonstrated current ratios within the healthy range (1.2 to 2) over the past five years, implying their capability to cover short-term debts with their existing assets. Notably, Abercrombie and American Eagle exhibit slightly higher ratios, suggesting either a stronger liquidity position or a conservative approach to managing assets.
However, a current ratio significantly exceeding 2 could imply inefficiency in asset utilization, though it might also signal preparations for expansion. In this dataset, all four companies generally maintain current ratios indicative of financial stability, without indicating excessive liquidity. This suggests effective management of assets relative to liabilities. Particularly noteworthy is American Eagle's current ratio increase in the last 12 months, possibly indicating asset accumulation for strategic endeavors.

Figure 4: Current Ratio for GPS and Competitors (Graphed)Source: FactSet

Accounts Receivable

Accounts Receivable as a Percent of Total Assets

Figure 5: Accounts Receivable as a Percent of Total Assets for GPS and Competitors Source: FactSet

The ratio of Accounts Receivables (AR) to total assets remains relatively stable across all the companies examined. Accounts Receivables represent the amounts owed to the company by customers who have received goods or services but have not yet settled their payment. Since AR represents anticipated revenue, it is classified as an asset. A lower AR to total assets ratio is typically viewed favorably, suggesting a smaller volume of outstanding payments from customers.

Figure 6: Accounts Receivable as a Percent of Total Assets for GPS and Competitors (Graphed)Source:Factset

Days Sales Outstanding

Figure 7: Days Sales Outstanding for GPS and CompetitorsSource: FactSet

Days Sales Outstanding (DSO) measures the average number of days it takes for a company to receive payment after making a sale.GAP Inc. demonstrates a notably steady DSO across the board, which positively influences their cash flow, indicating a strong capacity to quickly convert sales into cash. Their DSO has an average of around 36.97 throughout the years with a high in 2020 because of the COVID-19 pandemic.

Figure 8: Days Sales Outstanding for GPS and CompetitorsSource: FactSet

Inventories

Inventory Method

Figure 9: Inventory Management for GPS and Competitors Source: FactSet

From GAP Inc.'s perspective, most companies typically employ the Weighted Average Cost method for inventory valuation. This method calculates an average cost per unit by dividing the total cost of goods available for sale by the total number of units available. This average cost is then used for both units sold during the period and for determining the value of ending inventory.However, it's noted that Urban Outfitters follows a different approach known as RIM (Retail Inventory Method). Like the Weighted Average Cost method, RIM also computes an average cost per unit by dividing the total cost of goods available for sale by the total number of units available. This average cost is then utilized for both units sold during the period and for assessing the value of ending inventory.

Inventory Turnover in Days

Figure 10: Inventory Turnover in Days for GPS and CompetitorsSource: FactSet

The data indicates the inventory turnover in days for GAP Inc., Abercrombie, Urban Outfitters, and American Eagle. A higher figure suggests a slower rate of inventory sales. GAP Inc. and Abercrombie exhibit fluctuating trends, with GAP reaching a peak in 2021 and Abercrombie showing marked improvement after a peak in 2020. Conversely, Urban Outfitters and American Eagle demonstrate a consistent increase in inventory days over the past few years, implying a slower pace in converting inventory into sales. Effective inventory management is crucial for these companies to minimize holding costs and maintain product appeal.

Figure 11: Inventory Turnover in Days for GPS and CompetitorsSource: FactSet

Accounts Payable

Days Payable Outstanding

Figure 12: Days Payable Outstanding for GPS and CompetitorsSource: FactSet

Days Payable Outstanding is the average number of days it takes the company to pay back its accounts payable. If a company has a high day payable outstanding it is usually a positive thing for the company. One thing it could mean is that they are taking a longer time to pay back their global supplier which is a positive for the company because it allows them to use the cash for a longer period of time. It is not always a positive though because that means that they could have a negative relationship with their suppliers.
Gap Inc. has on average the lowest days Payable Outstanding and have been relatively consistent besides the last 12 months. This is a positive for the company because have sufficient funds to pay their suppliers and have the ability to have positive and long-lasting relationships with their suppliers allowing them to move ahead of their competition.

Figure 13: Days Payable Outstanding for GPS and Competitors
Source: FactSet

Cash Collection Cycle

Figure 14: Cash Collection Cycle for GPS and Competitors Source: FactSet

The purpose of the cash collection cycle chows the amount of time in days it takes for a company to convert its inventory into cash flows specifically from sales. It shows how long their cash flows are held up before they can convert it into cash.
When looking at GAP Inc., over the past 5 years they have had one of the highest Cash Collection Cycles, which shows that they are not the most efficient when turning their transactions into cash, which hurts their Free Cash Flow.

Figure 15: Cash Collection Cycle for GPS and Competitors (graphed)Source: FactSet

Long-Term Fixed Assets

Fixed Assets as a Percent of Total Assets

Figure 16: Fixed Assets as a Percent of Total Assets for GPS and Competitors Source: FactSet

Fixed Assets as a Percent of Total Assets is a financial metric that indicates the proportion of a company's assets. This helps with investors assess to what extent the company relies on long-term investments.
GAP Inc. has one of the highest Fixed Assets as a Percent of Total Assets out of its competitors means they have invested lots of money into physical assets. They are set on long-term growth to meet the demand increase in the near future.

Figure 17: Fixed Assets as a Percent of Total Assets for GPS and CompetitorsSource: FactSet

PPE Turnover

Figure 18: PPE Turnover for GPS and CompetitorsSource: FactSet

The Property, Plant, and Equipment (PPE) turnover ratio measures how efficiently a company is utilizing its fixed assets to generate sales.
GAP Inc. has had pretty consistent and structured PPE Turnover meaning they efficiently use their assets to help them generate revenue. Over the past 5 years Abercrombie & Fitch has had the highest ratio showing as a dificult competitor for GAP Inc.

Figure 19: PPE Turnover for GPS and Competitors (graphed)

Link to Excel: The Gap Inc NYSE GPS Financials MASTER.xlsx

Page updated

Report abuse