In Liz Clairbornes case,
Debt Ratio = Total Debt/Total asset value = 78%.
In Kenneth Coles case,
Debt Ratio = Total Debt/Total Asset = 77%
As we can see, the debt ratio value is similar in the two companies and shows a reasonable financing of the business with outside financial sources.
The Times Interest Earned value (TIE) shows how much income can decrease in the company without financial problems appearing, as an incapacity to pay the annual interest rates.
At Kenneth Cole, TIE = Earnings Before Interest and Taxes/Interest Expense = 32,890,000/40,000 = 822 times. The value itself may appear ludicrous, but the reason is quite simple. If we look at the statement of cash flows, the cash paid for interest in 2003 is only $40,000, similar to the previous years.
In Liz Clairbornes case, TIE = 392,072/30,509 = 12.85
The large difference between the two companies can be explained by the different financial structure in each case. If in Liz Clairbornes case, financing by foreign capital is used quite often, as a proportion of overall capital, Kenneth Cole uses very little, with low interest expenses.
In terms of profitability ratios, we shall be using the profit margin on sales indicator and the return on total assets ratio. The former shows how much profit is retained at each dollar of goods sold.
Kenneth Cole: Profit margin on sales = Net Income after Taxes/Net Sales = 7.6%
Liz Clairborne: Profit margin on sales = Net Income after Taxes/Net Sales = 6.6%
The figures obtained show a higher net income as a proportion of net sales obtained in Kenneth Coles case. This shows either that the company is selling at higher prices (which does not necessarily mean a positive thing) or that the operating costs are lower in Kenneth Coles case.
The return on total assets indicator shows the overall return of the entire capital invested in the company (total assets) and is also referred to as the return on investment.
This is calculated by dividing net profit by the total asset value.
Liz Clairbone: Return on Total Assets = 10.7%
Kenneth Cole: Return on Total Assets = 11.9%
As we can see, the difference in overall return on investment between the two companies is 1.2%. This comes to complete the result previously obtained and shows that the higher profit margin on sales obtained at Kenneth Cole have reverberations in the overall return as well.
In terms of market ratios, the earnings per share indicator and the price-to-earnings ratio should give us a clear picture of each companys presence on the stock exchange.
In terms of the earnings per share indicator, Liz Clairbornes amounts for $2.766 per share, while Kenneth Coles is $1.774. As we can see, the earnings per share in the case of the first company is almost $1 higher.
The P/E indicator shows 14.56 for Liz Clairborne and 15.51 for Kenneth Cole. The P/E ratios are generally higher for companies that tend to perform better, however, while Kenneth Cole may be considered a better performer in this case, the difference is less than 1 and not really significant.
The financial ratio analysis provided shows two large differences for the current ratio and the Times Interest Earned indicator. The current ratio is high for both companies, but significantly higher in Kenneth Coles case. This shows a very prudent cash policy, with enough cash and liquid reserves to cover the current liabilities over four times.
If we follow along the debt policy in Kenneth Coles case, this is quite obvious. Indeed, as we have seen, the interest expenses in this companys case are minimal, which comes to show that the company prefers to use as little foreign capital and debt as possible and that it has an extremely prudent overall financial policy.
On the other hand, Liz Clairborne is more daring, with a much smaller current.