Cherokee Inc Balance Sheet
Cherokee Financial Liquidity and Leverage
Cherokee Inc. cash position starts with higher working capital and current ratio for the first four years (2007-2011). The company has greater ability to pay its short-term debts or obligations using short-term cash. It was decreasing yearly and this big leap in 2011 leaves the company with no sufficient cash to pay current obligations wherein it shows -$6.56.
Working capital (current assets less current liabilities); the current ratio (current assets over current liabilities); and quick ratio(total asset divided by total liabilities) computations were used to check the company’s ability to meet current obligations to pay bills, meet payroll and make loan payments.
- The working capital of in dollars was 27.66, 18.21, 12.61, 10.36, and 2.79 respectively with an average of 14.33. This tells us that their working capital was declining and serves as the basis of their operating cycle.
- Their current ratio was 2.06:1, 2.37:1, 2.40:1, 2.28:1 and 1.17:1 respectively. Average of 2.06:1.
It means the company has $2.06, 2.37, 2.40, 2.28 and 1.17 of current assets for every $1 of current liabilities.
- Their cash & cash equivalent minus current liabilities in dollars was 18.40, 8.70, 4.65, 1.31 and -6.56 respectively. Shows that it was decreasing to the point in 2011 cash; a negative amount was not sufficient to pay for their current obligations.
Cherokee’s working capital against total assets and total revenue was also declining. The year 2011 marked the effect in their declining operations, thus, management was inefficient in handling their cash and other resources. In checking the composition of the company’s working capital against the total asset and total revenue from 2007 to 2011, computation as well as computed working capital per share was stated below:
- The networking capital ratio was 0.44, 0.43, 0.40, 0.38, and 0.10. This shows the decreasing trend in the working capital against total assets.
- Working capital per dollar revenue was 0.36, 0.44, 0.35, 0.32 and 0.09. This shows a decreasing trend in the working capital against total revenue.
- While their working capital per share in dollars was 3.13, 2.04, 1.43, 1.18 and 0.33 respectively. Average of $1.62. This represents that 2007 and 2008 were good, and 2009 to 2011 was below the yearly average of $1.62 per share.
Cherokee Cash Efficiency
Cherokee Inc’s accounts receivable turnover, it began with 10.57 times in 2007, a good start with only 34.52 days. But with the following years, it falls to only 4.64 times thus increasing the number of days receivable. If terms are net 30 days net, receivable balance equals to more than 40 days sale would indicate slow collections. For the longer accounts carried, the smaller will be the percentage return realized on invested capital. Hence, their days payable started also with 4.4 days in 2007 ends up 22.2 days in 2011. This means it takes longer to pay their payables to their debtors. Their cash conversion cycle takes longer too, from one month to almost two months, as well as their accounts receivables to be converted to cash to pay accounts payable.
- This will provide a rough scale on how well receivables was turning into cash, so, accounts receivable turnover was 10.57, 5.65, 6.61, 4.69 and 4.64 from 2007 to 2011 respectively. Average of 6.43 times. And the average collection period was 34.52, 64.5, 55.2,77.8, and 78.7 days. Average of 62.14 days. This measure the movement of accounts receivables or the average time it takes to collect an account and depends on the credit terms the company is offering to its customers.
- Days payable was 4.4, 7.2, 9.6, 10.9, and 22.2. Average of 10.86 days. This tells us that the company takes 4.4, 7.2, 9.6, 10.9 and 22.2 with an average of 10.86 days to pay its debtors.
- Cash conversion cycle was 30.1, 57.4, 45.7, 66.9, and 56.6 days respectively. Average of 51.34 days. This was computed as days receivable fewer days payable and this means the length of time for cash to complete the operating cycle.
Total utilization of asset tells us that asset turnover was 1.23, 0.97 times, 1.14 times, 1.20 times and 1.13 times a year. Furthermore, the up and down trend means the company was not generating a favorable revenue against the utilization of total assets.
Debt ratio shows how the company was levered. In 2009, it fell down to 28 percent, then increased by 59 percent in 2011 with the average of 38 percent of the total assets being supplied by creditors or short-term liabilities; and that they were not relying on external sources for financing their assets. Debt to worth ratio is used in determining the debt ceiling but vary from company to company and industry to industry. Only in 2011 and 2007, they showed a higher ratio that is more than the yearly average of 69 percent because it fell down in 2008-2009.
Data below show the more detailed values:
- Debt ratio was 0.42, 0.31, 0.28, 0.30 and 0.59 from 2007 to 2011 respectively with an average of 0.38 or 38 percent.
- Debt to worth ratio was 0.72, 0.45, 0.40, 0.43, and 1.46 from 2007 to 2011 respectively. Average of 69 percent.
To check the ability of the company in paying short-term liabilities, solvency ratio was 1.37, 1.34, 1.75, 1.73 and 0.57 from 2007 to 2011 respectively with an average of 135.2 percent. In the first four years, the company illustrates that they were solvent but in 2011 it declined rapidly to 57 percent which was very low. If Cherokee’s operation will not increase, revenues, as well as its net income for the coming year, will be in trouble financially because they will not be capable of meeting its obligation in the long run.
This show that management operating performance in 2007 return was 56 percent in utilizing their total assets, in 2008 due to economic crises returns decrease to 38%, in 2009 and 2010 it increased to 45 percent and 46 percent respectively. But in 2011 it decreases down to 28% for net income is only $7.72 from $12.57 in 2010. It is mainly due to decrease revenues. To verify their general earning power, their return of assets in percentage was 56, 38, 45, 46 and 28 from 2007 to 2011 respectively. This shows the rate of return on their total assets, that for every $1 of money invested in capital they generate in dollars 0.56, 0.38, 0.45, 0.46, and 0.28 of revenue from 2007 to 2011 respectively.
In totality, the relationship of ownership of the company’s total assets was 38 percent claimed by creditors and 62 percent claimed by shareholders. The company did not have long-term liabilities or debts; they are financed with current capital. The data below further interpret this:
- Total liabilities to total assets in percentage was 42, 31, 28, 30 and 59 claims to their total assets. Average of 38 percent.
- Stockholders’ equity to total assets in percentage was 58, 69, 72, 70 and 41 claim to their total assets. Average of 62 percent.
Return on equity indicates the profitability of the company to their stockholders. The return was up and down trend in 2007 and 2008 but it went up in 2009, 2010 and 2011. Thus, ending a return of 70 percent is not bad for their stockholders. This show the rate of return of their stockholder’s equity; that for every $1 of money invested, they generate 0.964, 0.556, 0.631, 0.659 and 0.70 of revenue in dollars from 2007 to 2011 respectively.
Trend ratio is used to study the movement of selected items in the balance sheet in yearly horizontal growth or decrease using the earlier year. Below is the summary of data using 2007 as the base year.
- Cash & cash equivalent in percentage was 100, 49, 30.6, 21 and 21.5. This shows a declining trend from 2007 to 2010, except in 2011 it increased 0.5 percent compared to 2010.
- Their current assets movement in percentage was 100, 58, 40, 34 and 35.
- Total assets in percentage were 100, 68.7, 51, 43.61 and 43.62.
- Current liabilities or total liabilities in percentage was 100, 50.6, 34, 31, and 61.7. This illustrates that the company does not have any long-term debts; only current liabilities; which tells us that it is also decreasing yearly until 2010. In the following year, the amount was doubled.
- Stockholders’ equity in percentage was 100, 81.8, 62.9, 52.7 and 30.5. This shows that the capital is decreasing yearly.
Looking at the above analysis, it tells us that all their accounts go down yearly with a minimal increase in 2011. Management is not doing their part in the company’s operation. For the past years, they did not rely on getting long-term liabilities to increase operating cash flow as well as to increase revenue and net profits.
Cherokee Inc Income Statement
The revenue of the company had an average of 43.56 for five years, thus, the trend was alarming because it is continuously decreased by 15, 11 and 6 percent. Gross profit was 100 percent huge of revenue and the company has no direct cost. Below was the result:
- Revenue in billion dollars was 76.63, 41.62, 36.22, 32.57 and 30.78, an average of 43.56
- Gross profit in percentage was 100 straight for five years.
The operating income and income before tax had an average difference of 46 percent, meaning there was no unusual expense acquired in five years. The income after tax was decreasing but in 2008 and 2009 was maintained by 40 percent. The net margin was also decreasing the same results of income after tax; it means there is no extraordinary item. The details are:
- Gross profit in percentage was 100 straight for five years.
- Operating income in percentage was 74, 63, 63, 63 and 42, an average of 27.88 percent.
- Income before tax in percentage was 76, 66, 64, 63 and 42, an average of 28. 34 percent.
- Income after tax in percentage was 45, 40, 40, 39 and 25
- Net margin in percentage was 45, 40, 40, 39 and 25, an average of 38 percent.
After deducting all the expenses, the income of the company was profitable with an average of 38 percent for five years but was not progressive. The movement was downward because the revenue also went down for five years.
To determine the net margin, we consider the cost and expenses. Does the company manage its cost efficiently? How much the total expense incurred for the year? Then, was the company profitable? Below are the results:
- No direct cost of revenue.
- The selling & general administrative expense in percentage was 24, 34, 33, 33 and 53.
- Depreciation in percentage was 1, 3, 4, 4 and 5.
- The income tax in percentage was 30, 26, 24, 24 and 17.
- Total expense incurred in percentage was 56, 63, 61, 61 and 75.
- The net margin in percentage was 45, 40, 40, 39 and 25.
Based on the above data, the expenses were managed efficiently; there was no direct cost of revenue. The selling and general expense had an increased margin of 10 percent in 2008 and down to 1 percent in 2009 and 2010. It jumped by 20 percent in 2011. Thus, the net margin from 2007 to 2011 was profitable but due to the increase in expenses in 2011 it was affected, resulting in 25 percent net. Overall the net margin was still sustainable.
- In analyzing, the return on asset, equity and investment were used to measure management effectiveness. The results are:
- Return on the asset in percentage was 56, 38, 45, 46 and 28, an average of 43.
- Return on equity in percentage was 96, 56, 63, 66 and 70, an average of 70.
- Return on investment in percentage was -161, -3937, 176, 147 and 70.
The management was effective in handling their resources, in terms of their asset and equity; for their five years of operation, the return for every $1, it had .43 and .70 dollars, respectively. The return on investment was not quite good and they still need to work it on. For the last two years (2007 to 2008) it had a negative return, though in 2009 it recovered to 176 percent it went down from 2010 to 2011.
Cherokee Cash Flow
Cherokee Cash Flow From Operating Activities
Cash from operating activities is the cash available for the operation. By using this, we can determine if the company had enough funds for the operation and know what are the key accounts affected, how much are the changes in working capital. Below were the results for the company:
- Net income/starting line was 34.79, 16.44, 14.35, 12.57 and 7.72
- Changes in working capital were 17.86, -14.19, -0.57, -0.98 and 2.63
- Cash from operating activities was 53.96, 4.9, 15.96, 13.74 and 12.51
The cash from operating activities had a positive result but the movement was decreasing. It had a bulk decrease in 2008 by 91 percent and in 2009 slightly recovered by 69 percent; it had decreased again in 14 and 8 percent in 2010 and 2011, respectively. This was due to the net income going down continuously.
Cherokee Cash Flow from Investing
- Purchase of fixed assets was $-0.03, -0.04, -0.08, -0.05 and -0.06
- Purchase/acquisition of intangibles was $-0.26, -1.39, -0.34, -0.29 and -0.32
- Cash from investing activities was $-0.29, -1.43, -0.42,-0.35 and -0.38
Data show they had invested more in the acquisition of intangibles; the total average for five years is -2.6; compared to a fixed asset with a total average of –.26. This means that total cash from investing in 2008 had increased by 1.14 and from 2009 to 2010, decreased by 1.01 and .7 respectively.
Cherokee Cash Flow from Financing
We can determine if the company had raised additional funds through cash from financing. What was unique about this company is that they issue stocks of cash dividends. Below are the results:
- Financing cash flow items was 0.21, 0.19, 0.15, 0 and 0.
- Total cash dividends paid was -22.43, -26.69, -22.24, -17.63 and -13.46, average for five years -20.49.
- Cash from financing activities was -20.99, -26.08, -23.84, -17.63 and -11.96.
- The Free cash flow was 76.68, 33.02, 38.62, 31.72 and 26.35
- Free cash flow per share was 8.71, 3.71, 4.39, 3.60 and 3.10
After deducting the capital expenditure and dividend, the results had a positive free cash flow. It was in a sideways movement that in 2008, it decreased by 57 percent and 2009 increased by 5.6 percent.
Cherokee Cash Flow Efficiency
- Cash flow from sales to sales ratio 54.79, 5.94, 16.88, 14.42 and 13.01.
- Cash flow solvency 6.65, 0.72, 2.62, 1.91 and 0.77
- Cash flow margin 0.70, 0.12, 0.44, 0.42 and 0.41
It indicates that in 2007 it has a greater amount of cash generated from sales in every $1; it had 5.48 compared in 2008 wherein it only had .06. The cash flow solvency was also in sideways as well as the cash flow margin.
Written by Nelly, Rio, and Dyne
Edited by Cris