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Gap Inc’s inventory turnover of 5. 27 shows that the Gap has adopted the right inventory management policy. This turn over also has some implications on the working capital requirement of the company. Gap Inc. is moving at a faster pace in contrast with the industry trend and this ratio also reveals that the product has a very good demand in the market and this management policy helps in capitalization of profit. Managing assets in an efficient manner is an art and Gap Inc is a real artist as they have utilized their asset to its full capacity.
The Gap has been managing assets in such a manner that every component of total asset utilizes its full capacity as no machinery is kept idle and it fulfills the demand of the business and results in complete utilization of the financing through which asset acquisition is made. Gap Inc. ’s management of fixed asset is also fine but upgrades and acquisitions are issues that will need to be sorted out from their side in order to improve their sales even more.
Dependency on debt financing is not a bad habit but it has consequences if one overly relies on it. The LTD to equity ratio explains the tendency of the company towards the debt financing & the firm is slightly more inclined towards injecting more debt into the business in order to meet the requirement of the business. The Gap has converted all its LTD into current maturities, which is why no long-term debt is reported on the balance sheet.
Gap Inc debt ratio suggest the fact that 4% will produce best possible output if the top management is able to earn a rate of return on assets greater than the rate of interest paid to creditors in the form of interest expense. However a high debt ratio can be very unfavorable if the return on assets falls below the interest paid to creditors. While on the other hand, from the competitors and industry’s debt to equity ratio is quite high primarily due to the business condition, seasonal patterns, product versatility or low reported earnings increases the probability on debt financing.
The ratio of competitors suggest that high debt to equity ratio distorts the stockholders equity and also this ratio sends the wrong image to the stock holders and the debt holders when the company requires more debt. Cash flow analysis is the major tool for examining the overall performance of the business. The cash flow of Gap Inc satisfies its operational activities and also meets its existing capital resources adequately.
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