Phillips-Van Heusen Corporation and Levi Strauss & Co.’s Vertical Analysis of Financial Statements

Introduction

Vertical analysis of the financial statements of a company is attempted by preparing and presenting common size statements. This analysis reflects the individual items as shown in the financial reports expressed as a percent of the total of different heads included in such reports.

Phillips-Van Heusen Corporation

From the vertical analysis of the balance sheets for the company for the year, it is noticed that the current assets as a percentage of total assets is 38.5%. This is mainly due to the smaller proportion of the cash and cash equivalent portion of the current assets. The property and equipments as a percentage to total assets in the year 2008 is 10.7%, whereas the company has a higher proportion of intangible assets at 48.9% of the total assets of the company. This shows that the company’s asset position is not very strong, as against the small percentage of property, plant and equipment.

The company has a strong stockholders’ equity with 44% of the liabilities representing the liabilities. The long-term liabilities account for 39.4% showing that the company is not a highly leveraged one. The proportion of debts and equity are within limits making the financial position of the company a sound one. Nevertheless, the character of assets is not very strong. The company carries only a small proportion of 16.6% of the total liabilities as current liabilities.

Levi Strauss & Co

The analysis of the balance sheet of the company indicates that the current assets of the company are 50% of the total assets of the company. The company must be suffering from a severe cash flow problem because the inventory and trade receivables account for 33.6% of the total assets. However, the company holds only 11.5% of the total assets as intangible assets as against the 48.9% of PHV. The company has only 14.4% of the total assets represented by property, plant and equipment.

On the liabilities side, the current liabilities are 24.3% and the long-term debts are 86.76% totaling to more than the equity of the company, resulting in a negative equity of 11.14%. There are no retained earnings available with the company. This situation shows a weak financial position of the company. A comparative analysis of the company’s balance sheets is presented in the following table.

Balances as at 2008 PHV Levi
Current Assets 38.5% 50.4%
Property Plant and Equipment 10.7% 14.4%
Intangible Assets 48.9% 11.5%
Other Assets 1.9% 23.7%
Total Assets 100.0% 100.0%
Current Liabilities 16.6% 24.3%
Long-term debt 39.4% 86.8%
Stockholders’ equity 44.0% – 11.1%
Total Liabilities 100.0% 100.0%

Solvency Ratios

The solvency ratios reflect business risks, representing the ability of a company to pay its debts, because the ratios indicate the amount of debts that the company would be able to handle. The ratios also represent the amount of investment that the company genuinely has, which enables the company run its operations.

Debt to Equity

Debt to equity ratio measures the net worth of the company. Debt to equity is calculated by dividing total debt by total stockholders’ equity. (Total Debt/Stockholder’s Equity)

Phillips-Van Heusen Corporation

Total Long-term Debt = 855,963
Total Equity = 956,283
Debt to Equity = 89%

Levi Strauss & Co

Total Long-term Debt = 2,593,586
Total Equity = – 333,119
Debt to Equity = – 778%

The debt to equity ratio of PVH is very high showing that the company has a lower net worth. The company has to work towards reducing the long-term liabilities before it can consider taking any more debt. The company can also reduce the debt to equity by increasing its retained earnings. In the case of Levi, the company suffers from a negative equity indicating that the stockholders’ equity has been eroded in the losses made by the company in the past. This is an alarming situation and the company has to increase its retained earnings or introduce fresh capital to make good the situation.

Debt to Assets

This ratio shows the percentage of the company’s assets that are being financed by long-term debts. This ratio is calculated by dividing the total debt by the total assets of the company (Total Debt/Total Assets).

Phillips-Van Heusen Corporation

Total Long-term Debt = 855,963
Total Assets = 2,172,394
Debt to Assets = 39%

Levi Strauss & Co

Total Long-term Debt = 2,593,586
Total Assets = 2,989,381
Debt to Equity = 86.8%

In general, no more than 50% of any company’s assets must be financed by long-term debts. The company can reduce this percentage by paying off certain portion of the long-term debts from the cash inflows of the company. In the case of PHV, only 39% of the assets are financed by the long-term debts, whereas in the case of Levi, the ratio of total debts to total assets is very high indicating that the company has borrowed heavily from the market to meet even its current liabilities, which is a dangerous position.

Conclusion

Considering the solvency ratios and the vertical analysis of the companies Philips-Van Heusen and Levi, it appears that the company Levi is undergoing severe financial stress in the absence of cash inflows. A sizeable portion of the company’s assets is locked in inventory and debtors indicating that the company has a poor liquidity position, which has resulted in heavy long-term borrowings. This situation may lead to the bankruptcy of the company. On the other hand, though the liquidity of PHV is comparatively better, the quality of its assets is not strong as the company holds about 50% of its assets as intangible assets.

Appendix

Phillips-Van Heusen Corporation
Vertical Analysis of Balance Sheet As At February 3, 2008
Particulars USD USD %
Assets
Current Assets:
Cash and cash equivalents 269914 12.4%
Trade Receivables net of allowances 154355 7.1%
Other receivables 31622 1.5%
Inventories net 322223 14.8%
Prepaid expenses 48295 2.2%
Other including deferred taxes 9810 0.5%
Total Current assets 836219 38.5%
Property, Plant and Equipment, net 232028 10.7%
Goodwill 322001 14.8%
Trade names 621135 28.6%
Perpetual Licensing Rights 86000 4.0%
Other Intangibles 33243 1.5%
Other Assets 41768 1.9%
Total Assets 2172394 100%
Liabilities
Current Liabilities:
Accounts payable 112829 5.2%
Accrued Expenses 212900 9.8%
Deferred revenue 34419 1.6%
Total Current Liabilities 360148 16.6%
Long-term Debt 399552 18.4%
Other Liabilities including deferred taxes 456411 21.0%
Stock holders’ Equity
Common stock 56506
Additional Capital 558960
Retained Earnings 558538
Accumulated other comprehensive Loss -17384
1156620
Less: Stock held in treasury at cost -200337
Total Stockholder’s equity 956283 44.0%
Total Liabilities and stockholders’ equity 2172394 100%
Levi Strauss & Co
Vertical Analysis of Balance Sheet As At November 30, 2008
Particulars USD USD %
Assets
Current Assets:
Cash and cash equivalents 270804 9.1%
Restricted cash 3684 0.1%
Trade receivables net of allowances 552252 18.5%
Total inventories 451272 15.1%
Deferred taxes 135508 4.5%
Other current assets 92344 3.1%
Total Current assets 1505864 50.4%
Property, Plant and Equipment net 430070 14.4%
Goodwill 241768 8.1%
Other intangible asset 103198 3.5%
Non-current deferred tax 601526 20.1%
Other Assets 106955 3.6%
1483517 49.6%
Total Assets 2989381 100.0%
Liabilities
Current Liabilities
Short-term borrowings 18749 0.63%
Current maturities of long-term debt 0 0.00%
Current maturities of capital leases 1852 0.06%
Accounts payable 198220 6.63%
Restructuring liabilities 1410 0.05%
Other accrued liabilities 269609 9.02%
Accrued salaries and wages 195434 6.54%
Accrued interest payable 28709 0.96%
Accrued income tax 12993 0.43%
Total Current Liabilities 726976 24.32%
Long-term debt 1834151 61.36%
Long-term capital leases 5513 0.18%
Postretirement medical benefits 156834 5.25%
Pension liability 382503 12.80%
Long-term employee related benefits 97508 3.26%
Long-term income tax liabilities 55862 1.87%
other long-term liabilities 43480 1.45%
Minority interest 17735 0.59%
Total Liabilities 2593586 86.76%
Commitments and contingencies
Temporary equity 1938 0.06%
Stockholders’ equity
Common stock 373 0.01%
Additional paid in capital 39532 1.32%
Accumulated deficit -123157 -4.12%
Accumulated other comprehensive loss -249867 -8.36%
Total Stockholders’ deficit -333119 -11.14%
Total liabilities 2989381 100.00%
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