Luna Lighting, a retail firm, has experienced modest sales growth over the past

Question

Luna Lighting, a retail firm, has experienced modest sales growth over the past three vears but has had difficulty translating the expansion of sales into improved profitability Using three years' financial statements, you have developed the following ratio calcula- tions and industry comparisons. Based on this information, suggest possible reasons for Luna's profitability problems Industry Averages 2016 2014 2.2X 47 days 2016 2.1X Current Average collection period Inventory turnover Fixed asset turnover Total asset turnover Debt ratio Times interest earned Fixed charge coverage Gross profit margin Operating profit margin Net profit margin Return on assets Return on equity 2.3X 2.3X 50 days 46 days 8.2X 3.0X 1.2X 50% 8.2X 4.5X 43% 45 days 8.3X 2.7X 1.1X 8.1X 3.3X 1.3X 50% 8.1X 3.5X 1.5X 54% 7.2X 5.1X 8.1X 4.0X 43% 43% 73% 4.3% 35% 37% 7.4% 4.0% 5.0% 11.8% 11.4%

Explanation / Answer

High interest cost as there is a huge drop from operating profit margin to net profit margin

High depreciation and SG&A expenses as there is huge drop from gross profit margin to operating profit margin

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