Question

Create a debt chart American Apparel Financial Analysis report.

1Calculate the current ratio, debt ratio, profit margin, and inventory turnover of the company.

2 Explain what each calculated ratio tells you about how well (or poorly) the company is performing

Answer 1

Company figures for 2013 and 2012  

2013 2012

Current assets $215,296 $224,390

Current liabilities $161,989 $161,609

Total Debt $411,156 $306,128

Total assets $333,752 $328,212

Inventory $169,378 $174,229

Sales $633,941 $617,310

COGS $313,056 $289,927

Income $106,298 $37,272

Current Ratio = Current assets / Current Liabilities

2012 = 224,390 / 161,609 = 1.388

2013 = 215,296 / 161,989 = 1.32

The current ratio tells us about the liquidity position of the company and how effective is the company in meeting its short term obliations and still recover cash. Company's current ratio decreased from 1.39 in 2012 to 1.32 in 2013 which means the company has positive cash balances to cover obligations but the reduced ratio means that the company lost its grip on asset balances.

Debt Ratio = Total debt / Total assets

2012 = 306,128 / 328,212 = 0.933

2013 = 411,156 / 333,752 = 1.23

The Debt ratio tells us the quantity of debt capital invested in assets for a company. The debt ratio increased from 0.933 in 2012 to 1.23 in 2013, this was mainly due to increase in debt of the company in 2013.

Profit Margin = Net income / Net sales * 100

2012 = 37,272 / 617,310 * 100 = 6.04%

2013 = 106,298 / 633,941 * 100 = 16.77%

The Profit margin ratio tells us that how much profit the company is earning from the revenues. In 2012 the profit margin was 6.04 which increased massively to 16.77% in 2013 which was a positive factor for the company.

After increase in profits still the company went bankrupt as high levels of debt made the managers not able to cope and yet surrender.