Harrod’s Sporting Goods Case Study

Harrod’s Sporting Goods Case Study

FIN/486

Harrod’s Sporting Goods Case Study

Calculate the profitability ratios for all three years using the formulas provided in section “A. Profitability Ratios” within chapter 3: Profit margin, return on assets (a and b), return on equity (a and b).

Profit margin formula:

Profit margin = net income / sales revenue

Return on assets formula:

Return on assets = net income / total assets

Return on equity formula:

Return on equity = net income / stakeholders equity

When evaluating the ratios of profit margin, return on assets, and return on equity, we can see that these figures have increased over the years between 2013 and 2015. The year 2015 had the highest income from sales, taking into consideration total assets and stakeholders equity. Between the years of 2014 and 2015, the percentage of profit dropped from 5.24% to 3.99%. The return on assets percentage dropped from 7.23% to 5.71% from 2014 to 2015. The return on equity percentage dropped from 18.55% to 15.02% between 2014 and 2015. It seems as though it would be a good idea for the company to examine the business processes and operations to evaluate and replace inefficient products and assets. It would be a good idea to consider investing income when the profits are high.

$170,000 * 0.65 extraordinary loss (EL) = $110,500

1. The following adjustments were made:

Actual net income for 2015 = $200,318 (EL) + $110,500

Adjusted net income = $310,818

Profit margin = net income / sales revenue

Return on assets = net income / total assets

Return on equity = net income / stakeholders equity

With the adjustments made to the year 2015, it seems that the three financial ratios calculated have increased. Sales have increased in regards to the total cost of sales, which then led to a steady positive increase in the financial ratios. Asset management is currently producing enough positive revenues, so this system should be maintained. It also looks as though an increase in capital expenditures will be required. The monies invested by stockholders seems to be sufficient in order to continuously generate income over the next three years.

The industry ratio figures are as follows:

Harrod’s Sporting Goods

Selected Industry Ratios for 2015

Asset Turnover Ratio Formula:

Debt to Asset Ratio Formula:

The industrial ratios are smaller than the ratios analyzed after the adjustment. An example would be the ROE for the industry at 9.8%, while the analysis made is 23.30%. The ROA is roughly 8% from analysis, whereas the industrial analysis records 5.10%. The same happens with the profit margin. This also happens with the asset turnover, which from the 2015 analysis records 1.43x, while it is 1.33x for the industry. The debt ratio is 0.62 from analysis, but is 0.43 for industrial analysis. These indicate that the industrial ratios are slightly lower.

Receivable turnover only half sales are on credit. Therefore:

Inventory turnover

Fixed asset turnover

In question 6, I can see that the most utilized variable is the receivable turnovers indicating that the company is flexible to collect debt. This also suggests that the company is able to manage the credit sales more than the other assets. This is followed by the inventory, which the company has been able to turn it around 4.75X. This would indicate the company sells 4.75 times the initial stock. Lastly, the company seems to have a poor management of the fixed assets, as they have recorded the smallest ratio. The total assets ratio is 1.43X from the calculations, while the industrial analysis is 1.33X. The fixed assets turnover ratio is 2.77X, which implies that the fixed assets contribute more to sales than the company makes when compared to current assets. This shows that it would be good for the company to invest more in fixed assets rather than current assets.

Harrod’s Sporting Goods

Selected Industry Ratios for 2015

In my opinion, Becky Harrod seems to have a legitimate complaint on the over prime charge being issued to the company for the loan. When you look at the trends in the financial ratios, the company seems to be both strong and progressive. An example of this would be how the company’s asset ratio turnover has been increasing from 2013 to 2015. Also, the ratios are above 1, which implies the forever dollar the company is able to generate over 1 more dollar from it. We can see this when looking at the company in 2015; they were able to generate 1 dollar and 43 cents of a dollar. This shows that the company is able to pay for the loan within the shortest time possible, thus showing how they should not be overcharged for the loan. We also see from the analysis that the company has more assets compared to liabilities, since the debt to asset ratio stands at 0.62%. This shows that the company is stable and able to negotiate for a loan using the assets of the company. When looking at the ROA, ROE, and profit margin, we can see that they are all increasing and well above the standard figure, especially with the profit margin being over 20%. With all of this information in mind, I would definitely have to say that Becky Harrod has a legitimate complaint about the overcharge.