Luna Lighting, a retail firm, has experienced modest sales growth over the past
ID: 2442846 • Letter: L
Question
Luna Lighting, a retail firm, has experienced modest sales growth over the past three yearsbut has had difficulty translating the expansion of sales into improved profitability. Usingthree years’ financial statements, you have developed the following ratio calculations and industry comparisons. Based on this information, suggest possible reasons for Luna’s profitabilityproblems.2009 2008 2007 2009
Industry
Current 2.3X 2.3X 2.2X 2.1X
Average collection period 45 days 46 days 47 days 50 days
Inventory turnover 8.3X 8.2X 8.1X 8.3X
Fixed asset turnover 2.7X 3.0X 3.3 3.5X
Total asset turnover 1.1 1.2X 1.3X 1.5X
Debt ratio 50% 50% 50% 54%
Times interest earned 8.1X 8.2X 8.1X 7.2X
Fixed charge coverage 4.0X 4.5X 5.5X 5.1X
Gross profit margin 43% 43% 43% 40%
Operating profit margin 6.3 7.2% 8.0% 7.5%
Net profit margin 3.5% 4.0% 4.3% 4.2%
Return on assets 3.7% 5.0% 5.7% 6.4%
Return on equity 7.4% 9.9% 11.4% 11.8%
Explanation / Answer
The profitability ratios are : Gross Profit Margin Net Profit MArgin Return on Assets Return on Equity We can see that all these ratios are steadily declining. This might be due to decline in sales , since the average collection period has also declined. The sales have considerably declined as can be seen from the trend in turnover ratios. Reduction in sales can cause a decline in profits.Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.