Introduction
Vertical analysis of the financial statements of a company is attempted by preparing and presenting common size statements. This analysis reflects the individual items as shown in the financial reports expressed as a percent of the total of different heads included in such reports.
Phillips-Van Heusen Corporation
From the vertical analysis of the balance sheets for the company for the year, it is noticed that the current assets as a percentage of total assets is 38.5%. This is mainly due to the smaller proportion of the cash and cash equivalent portion of the current assets. The property and equipments as a percentage to total assets in the year 2008 is 10.7%, whereas the company has a higher proportion of intangible assets at 48.9% of the total assets of the company. This shows that the company’s asset position is not very strong, as against the small percentage of property, plant and equipment.
The company has a strong stockholders’ equity with 44% of the liabilities representing the liabilities. The long-term liabilities account for 39.4% showing that the company is not a highly leveraged one. The proportion of debts and equity are within limits making the financial position of the company a sound one. Nevertheless, the character of assets is not very strong. The company carries only a small proportion of 16.6% of the total liabilities as current liabilities.
Levi Strauss & Co
The analysis of the balance sheet of the company indicates that the current assets of the company are 50% of the total assets of the company. The company must be suffering from a severe cash flow problem because the inventory and trade receivables account for 33.6% of the total assets. However, the company holds only 11.5% of the total assets as intangible assets as against the 48.9% of PHV. The company has only 14.4% of the total assets represented by property, plant and equipment.
On the liabilities side, the current liabilities are 24.3% and the long-term debts are 86.76% totaling to more than the equity of the company, resulting in a negative equity of 11.14%. There are no retained earnings available with the company. This situation shows a weak financial position of the company. A comparative analysis of the company’s balance sheets is presented in the following table.
Solvency Ratios
The solvency ratios reflect business risks, representing the ability of a company to pay its debts, because the ratios indicate the amount of debts that the company would be able to handle. The ratios also represent the amount of investment that the company genuinely has, which enables the company run its operations.
Debt to Equity
Debt to equity ratio measures the net worth of the company. Debt to equity is calculated by dividing total debt by total stockholders’ equity. (Total Debt/Stockholder’s Equity)
Phillips-Van Heusen Corporation
Total Long-term Debt = 855,963
Total Equity = 956,283
Debt to Equity = 89%
Levi Strauss & Co
Total Long-term Debt = 2,593,586
Total Equity = – 333,119
Debt to Equity = – 778%
The debt to equity ratio of PVH is very high showing that the company has a lower net worth. The company has to work towards reducing the long-term liabilities before it can consider taking any more debt. The company can also reduce the debt to equity by increasing its retained earnings. In the case of Levi, the company suffers from a negative equity indicating that the stockholders’ equity has been eroded in the losses made by the company in the past. This is an alarming situation and the company has to increase its retained earnings or introduce fresh capital to make good the situation.
Debt to Assets
This ratio shows the percentage of the company’s assets that are being financed by long-term debts. This ratio is calculated by dividing the total debt by the total assets of the company (Total Debt/Total Assets).
Phillips-Van Heusen Corporation
Total Long-term Debt = 855,963
Total Assets = 2,172,394
Debt to Assets = 39%
Levi Strauss & Co
Total Long-term Debt = 2,593,586
Total Assets = 2,989,381
Debt to Equity = 86.8%
In general, no more than 50% of any company’s assets must be financed by long-term debts. The company can reduce this percentage by paying off certain portion of the long-term debts from the cash inflows of the company. In the case of PHV, only 39% of the assets are financed by the long-term debts, whereas in the case of Levi, the ratio of total debts to total assets is very high indicating that the company has borrowed heavily from the market to meet even its current liabilities, which is a dangerous position.
Conclusion
Considering the solvency ratios and the vertical analysis of the companies Philips-Van Heusen and Levi, it appears that the company Levi is undergoing severe financial stress in the absence of cash inflows. A sizeable portion of the company’s assets is locked in inventory and debtors indicating that the company has a poor liquidity position, which has resulted in heavy long-term borrowings. This situation may lead to the bankruptcy of the company. On the other hand, though the liquidity of PHV is comparatively better, the quality of its assets is not strong as the company holds about 50% of its assets as intangible assets.