The Times Interest Earned value (TIE) shows how much income can decrease in the company without financial problems appearing, as an incapacity to pay the annual interest rates.
At Kenneth Cole, TIE = Earnings Before Interest and Taxes/Interest Expense = 32,890,000/40,000 = 822 times. The value itself may appear ludicrous, but the reason is quite simple. If we look at the statement of cash flows, the cash paid for interest in 2003 is only $40,000, similar to the previous years.
In Liz Clairborne's case, TIE = 392,072/30,509 = 12.85
The large difference between the two companies can be explained by the different financial structure in each case. If in Liz Clairborne's case, financing by foreign capital is used quite often, as a proportion of overall capital, Kenneth Cole uses very little, with low interest expenses.
In terms of profitability ratios, we shall be using the profit margin on sales indicator and the return on total assets ratio. The former shows how much profit is retained at each dollar of goods sold.
Kenneth Cole: Profit margin on sales = Net Income after Taxes/Net Sales = 7.6%
Liz Clairborne: Profit margin on sales = Net Income after Taxes/Net Sales = 6.6%
The figures obtained show a higher net income as a proportion of net sales obtained in Kenneth Cole's case. This shows either that the company is selling at higher prices (which does not necessarily mean a positive thing) or that the operating costs are lower in Kenneth Cole's case.
The return on total assets indicator shows the overall return of the entire capital invested in the company (total assets) and is also referred to as the return on investment. This is calculated by dividing net profit by the total asset value.
Liz Clairbone: Return on Total Assets = 10.7%
Kenneth Cole: Return on Total Assets = 11.9%
As we can see, the difference in overall return on investment between the two companies is 1.2%. This comes to complete the result previously obtained...
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