Walter Garcia Brooks
Date: 10/5/2012
Reebok & LA Gear Analysis of two very different companies 1. Looking at both companies Return on Equity is pretty comparable between the two in 1990. However, we can see that LA Gear had a much better performance in the previous two years with a precipitous RoE in 1990 as compared to the previous two years. Reebok on the other had has reported a stable RoE in the last three years.
Looking at the component ratios of RoE we can see some some differences why LA Gear has had a huge drop on RoE lately.
The three components of RoE are illustrated below:
Profit Margin
Cost control
Pricing
Asset Turnover Ratio
Asset utilization
Financial Leverage Ratio For example, Profit Margin, which is a …show more content…
3. Comparing the net income against the cash flows from operations can give us in inside in regards to the long term profitability of both companies: Year | Reebok | LA Gear | | Net Income (M) | Cash from Operations (M) | Net Income (M) | Cash from Operations (M) | 1990 | $176.6 | $39.2 | $31.3 | -$40.3 | 1989 | $175.0 | $268.3 | $55.1 | -$48.9 | 1988 | $137.0 | $29.3 | $22.0 | $46.7 | Table [ 2 ]
As it can be seen in the Table 2, LA Gear has experiencing a financial spiral because it is having to borrow money to keep up with operation. In fact, in 1990 it had spent more cash than its actual income. This trend tell us that the long term solvency of LA Gear is in extremely bad shape. Reebok on the other hand, has a much stronger Net Income and strong cash flows from operations which can help fuel long term investment as well as short term liquidity to sustain operations. 4. Notes 4 and 7 from LA Gear statement increases the riskiness of the investing on LA Gear because on one hand, it seems that they continue increasing their line of credit to perhaps increase their debt, which in turn would worsen the current dire state (as of 1990). Note 7 is equally alarming because it leads us to believe that there is at least reason to suspect that LA Gear accounting practices is murky. In fact, looking at their impressive numbers prior to 1990 and their sudden fall, one can only wonder if the 1988 and 1989