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What was Gap's RM ranking in previous years? Has it risen or fallen?

Hey LeiLei,

I'm going to take the lazy man's approach to answering your question. I have last year's Gap annual report in front of me. One of the key metrics that has deteriorated for the company over the past two years is the cash-to-debt ratio. Meanwhile, the Flowie has improved a bit. Here are those two key balance sheet ratios for the past 3 years:

FY'98 FY'97 FY'96
Cash-to-Debt 0.96 1.57 15.5
Flowie 0.89 1.01 0.96

The most exciting thing on the income statement side has been the acceleration of sales growth:

FY'98 FY'97 FY'96
Sales Growth 39% 23% 20%

So, I believe the increased debt has been justified by the awesome sales growth -- all while keeping tight control of its working capital (as evidence by the steady-to-declining Flowie). Of course, in the years ahead, we'd like to see the flush cash from operations pay down that debt. If Gap can't do that, then there's a problem.

Okay, now let me try to veer this discussion back to your original question. Because of Gap's historically low gross and net margins, the company has never scored overly high on the Rule Maker system. And, the recent plummeting of the cash-to-debt ratio has only worsened the situation. Compared to today's score of 43, my guess is that Gap scored higher on the system following FY'96 and lower following FY'97.

It all goes to show that these scores are a starting point for analyzing companies. The numbers tell much or the story, but it's not all wrapped up in the total score. The individual ratios and margins deserve close inspection, as well.

Hope this helps. Maybe when I get a chance, I'll run the old numbers on Gap to test my above guestimates. (You got me kinda curious.)

Fool on,
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