Week 4 Discussion 1 and 2

Using The Children’s Place Inc., and their annual reports. Calculate the current ratio and quick ratio for the latest two years, obtain the industry average ratios from the Mergent Online database, which allows you to do industry comparison. • Discuss what each of these ratios tells you about the company’s current financial condition, and how they compare to the industry averages. •Identify the major causes of any changes in these ratios and discuss your assessment of the company based on these changes. •Review the balance sheet and the notes to the most recent financial statements, and identify any contingent liabilities. •Discuss whether or not you agree with how the company chose to treat each contingency on the financial statements (i.e., recorded vs. disclosed, but not recorded). •Discuss the effect on the financial statements of the company’s treatment of the contingency. Discuss whether the contingent liabilities change your assessment of the company.

Using The Children’s Place Inc. annual reports accessible on its investor website (Corporate.childrensplace, n.d.), we can calculate the current ratio and quick ratio as follows:

Current ratio = Current assets / current liabilities.

• In 2020: $449,880,000 / $595,007,000 = 0.756
• In 2021: $581,538,000 / $591,826,000 = 0.983

Quick ratio = Current assets – inventory / current liabilities. Quick ratio was 0.22 in 2021 ($0.16B-$0.72B), and 0.21 in 2020 ($0.12B-$0.60B). When comparing the firm’s ratio to two of its competitors, Abercrombie & Fitch and Buckle, we obtain the graphs in Appendix 1 and 2 for quick ratio and current ratio, respectively. When using 56 U.S. listed companies in the apparel industry, the average current ratio, and quick ratio as of 2021 were 1.46 and 0.61, respectively (ReadyRatios, 2020).

In 2020 and 2021, the current ratio for The Children’s Place Inc. was less than 1, implying that the company does not have enough to pay for its short-term obligations. However, the current ratio increased in 2021 compared to 2020, indicating an improvement in its financial performance. With an industry average of 1.46, the firm is in an undesirable situation. Children’s Place Inc. had a quick ratio of 0.21 in 2020 and 0.22 in 2021. The industry average was 0.61, implying the firm’s inability to meet short-term liabilities using its most liquid assets. The higher the quick ratio, the better a company’s liquidity and financial health. Using the information in Appendix 1 & 2, The Children’s Place Inc. is in a poorer financial position than its competitors. With this quick ratio, the firm would have to sell inventory to raise some cash to meet its obligations.

The company’s contingent liabilities include the commitments for re-sale of approximately $365.0 million and approximately $18.0 million for equipment, construction, and other non-merchandise commitments. Another liability is the operating lease and standby letters of credit commitments of $249.6 million and $7.4 million, respectively. Another liability is lawsuits, such as Rael v. The Children’s Place, Inc., and various other legal proceedings. It was right for the company to disclose the commitments and associated amounts because this improves shareholders’ trust in the financial stability of the firm. The lawsuits have no significance on the balance sheet because there is no recorded amount on this as a liability. These contingent liabilities do not change my assessment of the firm because its liquidity remains poor compared to the industry competitors, necessitating improvements.

References

Corporate.childrensplace. (n.d.). Annual Reports & Proxies. Investor.childrensplace. Retrieved October 4, 2022, from https://investor.childrensplace.com/financial-information/annuals-proxies

ReadyRatios. (2020). Apparel And Accessory Stores: industry financial ratios benchmarking. Www.readyratios.com. https://www.readyratios.com/sec/industry/56/

Appendix 1: Quick ratio comparison for The Children’s Place Inc., Abercrombie & Fitch, and Buckle.

Appendix 2: Current ratio comparison for The Children’s Place Inc., Abercrombie & Fitch, and Buckle.

Using The Children’s place and their annual reports •Calculate the debt-to-equity ratio and times interest earned ratio for the company for the latest two years. •Obtain the industry averages for these ratios and any other pertinent information from the Mergent Online database. •Discuss what each of these ratios tells you about the company’s use of debt and how it compares to the industry average. •Identify the major causes of any changes in these ratios and discuss your assessment of the company based on these changes. •If you were a lender, discuss whether you would you be willing to lend money to the company based on its use of debt.

Using The Children’s Place Inc. annual reports (Corporate.childrensplace, n.d.), we can find the debt to equity ratio by dividing total liabilities by the total equity.

• 2020: $946,210,000 / $1,181,397,000 = 0.8
• 2021: $811,988,000 / $1,037,460,000 = 0.78

For times interest earned ratio or Interest Coverage Ratio = EBIT / Interest Expense:

• 2020: -$61.188 million / $11.906 million = −5.1x
• 2021: $285.7 million / $18.634 million = 15.3x

Using U.S. listed companies in the apparel industry, the debt-to-equity ratio and interest coverage ratio are 1.66 and 12.08, respectively (ReadyRatios, 2020). Consequently, The Children’s Place Inc. recorded a slight decline in the debt-to-equity ratio in 2021 compared to 2020, which was also below the industry average. In 2021, the firm has $0.78 of debt for every dollar of equity, which when compared to the previous year and the industry averages, we can say The Children’s Place Inc. was in a better financial position in 2021. The lower the interest coverage ratio (times interest earned ratio), the more the company is burdened by debt expenses and the less capital it has to use in other ways (Camilleri, 2017). In 2020, the company’s interest coverage ratio was less than 1, implying that it wasn’t making enough money to pay its interest payments. In 2021, however, the firm recorded an interest coverage ratio of 15.3x, above the industry’s average of 12.08. Therefore, the company is extremely liquid and should not have a problem getting a loan to expand.

The reason the firm recorded a negative interest coverage ratio was the massive loss made during the year compared to the net income accrued in 2021. For instance, in the fiscal year 2020, the firm made a net loss of $140.4 million. In the fiscal year 2021, there were massive gains as net income increased from $327.6 million to $187.2 million, translating to a significant increase in the interest coverage ratio. Additionally, in 2021, the company benefited from the decrease in the effective tax rate primarily driven by tax benefits from the CARES Act 2020. The firm has improved financially over the period and is currently able to secure funding from investors because it can make over 15 times the amount of its current interest payments. Again, the firm has a relatively low debt to equity ratio implying that giving the company a loan would be a less risky investment. Therefore, I would be willing to lend money to the company.

References

Camilleri, E. (2017). Accounting for Financial Instruments : a Guide to Valuation and Risk Management. Taylor & Francis Group.

Corporate.childrensplace. (n.d.). Annual Reports & Proxies. Investor.childrensplace. Retrieved October 4, 2022, from https://investor.childrensplace.com/financial-information/annuals-proxies

ReadyRatios. (2020). Apparel And Accessory Stores: industry financial ratios benchmarking. Www.readyratios.com. https://www.readyratios.com/sec/industry/56/