The financial statements of Inditex and GAP, Inc are availed in different currency denomination (Inditex in Euros and GAP in dollars). The ratio comparison between the two companies might, therefore, be lost in the currency conversion, especially, since I performed the conversion using the current rates of exchange (1 dollar = 0.76 Euros) which are subject to fluctuations. The current ratio is a measure of the short-term solvency of a business. It measures the capability of a business to pay its liabilities that might arise in the near future, usually a period of not more than one year. The current ratio is a rough indicator of whether cash on hand in addition to the cash to be collected from receivable accounts and from selling inventory will be enough to pay off liabilities that will become due in the following period. (Tracy, Tracy, and CPA, 2008, pg. 287)The current ratio compares the assets a company can at short notice convert to cash to the liabilities it must pay in the short term. It generally checks if a company has the capability to meet current obligations as they become due. (Vance, 2003, pg 38) The profit margin indicates the profitability generated from revenue and it is, therefore, an important measure of operating performance. Furthermore, the profit margin also provides clues to a company’s pricing, cost structure, and production efficiency. (Shim, and Siegel, 1998, pg. 27) The percentage profit margin of Inditex increases annually indicating growth of the company, however, the profit margin of GAP, Inc is much less than that of Inditex indicating poor comparative performance. Return on assets measures whether assets are utilized productively by a company. It is crucial for assets to be used productively as idle assets tie up capital that could be used to invest in the development of new products,investing/buying out a rival or paying debts etc. Idle assets can also lead to losses due to deterioration of their value over time.
The Financial Statements of Inditex and GAP