The following information was reported by Gap, Inc. in its 2009 annual report. 2009 2008 2007...

The following information was reported by Gap, Inc. in its 2009 annual report.

	2009	2008	2007	2006	2005
Total assets (millions)	$7,985	$7,564	$7,838	$ 8,544	$ 8,821
Working capital	2,533	1,847	1,653	$ 2,757	$ 3,297
Current ratio	2.19:1	1.86:1	1.68:	2.21:1	2.70:1
Debt to total assets ratio	.39:1	.42:1	.45:	.39:1	.38:1
Earnings per share	$1.59	$1.35	$1.05	$0.94	$1.26

(a) Determine the overall percentage decrease in Gap"s total assets from 2005 to 2009. What was the average decrease per year?

(b) Comment on the change in Gap"s liquidity. Does working capital or the current ratio appear to provide a better indication of Gap"s liquidity? What might explain the change in Gap"s liquidity during this period?

(c) Comment on the change in Gap"s solvency during this period.

(d) Comment on the change in Gap"s profitability during this period. How might this affect your prediction about Gap"s future profitability?

Expert Solution

(a) Total assets in 2005 were $8821 and in 2009 it were $7985. The decrease in total assets were :

= [ (8821 - 7985) / 8821 ] *100 = 9.477%

(b) Liquidity is firm total assets which can be easily converted into trading form without causing any reduction in its value. Here the working capital is approximately 1/3rd or 1/4th of total assets which is a good sign, because the more working capital is, the more the daily transaction would be. Current ratio is total assets / total liability, which ratio is also good. So overall, that provide a good indication of the company's performance. During 2005-2008, current ratio and working capital were falling but in 2009 these both were rising, it means that company have adopted some good strategies to recover them in 2009.

(c) Solvency is the ability to pay debt while observing the total liquid assets of a firm. Debt ratio was always then 0.5. It was increasing till 2008 from 2005, but the company adopted some strategies in 2009 which reduced the debt ratio too.

(d) Total profitability can be known by earning per share which is rising over time. We can say that Gap have some good future in the market. It rising earning per share, falling debt ratio will take it to new heights.

Rahul Sunny answered 1 year ago

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