Interpreting profitability and risk ratios GlaxoSmithKline plc is a pharmaceutical company headquartered in the United Kingdom. Exhibit 6.33 presents financial statement ratios for GlaxoSmithKline for 2005, 2006, and 2007. Ignore the Line for Minority Interest in Subsidiaries, an account that Chapter 13 discusses Respond to each of the following question

a. What are the likely reasons for the increase in the profit margin for ROA during the three-year period from 2005 to 2007?

b. What are the Likely reasons for the decrease in the total asset turnover from .88 in 2006 to .81 in 2007?

c. Did financial leverage work to the advantage of the common shareholders in 2007? Explain in such a way that indicates your understanding of the concept of financial leverage.

d. What are the likely reasons for the decrease in the current ratio from 1.5 in 2006 to 1.3 in 2007?

e. What are the likely reasons for the pattern of changes in the two cash flow ratios during the three-year period from 2005 to 2007?

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GlaxoSmithKline ple Financial Statement Ratios (Problem 30) EXHIBIT 6.33 2005 2007 2006 Growth Rate in Sales . 7.6% 8.5% 6.3% Profitability Ratios Rate of Return on Assets .. 20.6% 21.9% 20.5% Profit Margin for ROA Ratio 23.7% 24.8% 25.1% Total Assets Turnover Ratio 87 .88 .81 Rate of Return on Common Shareholders' Equity Profit Margin for ROCE Ratio. 72.5% 64.3% 55.8% 21.6% 23.2% 23.0% Capital Structure Leverage Ratio 3.9 3.1 3.0 Accounts Receivable Tumover Ratio . Inventory Tumover Ratio . 5.2 5.3 5.1 2.2 2.2 2.0 3.1 Fixed Asset Turnover Ratio 3.4 3.4 Common Size Income Statement Sales ... 100.0% 100.0% 100.0% Investment Income.. 1.6 1.7 2.2 Other Revenues 1.7 1.2 1.9 Cost of Goods Sold (22.0) (21.6) (23.4) Selling and Administrative Research and Development. Other Operating Expenses. Income Taxes.. Profit Margin for ROA Interest Expense (net of tax effect). Minority Interest in Subsidiaries . Profit Margin for ROCE., (33.5) (14.5) (31.2) (14.9) (30.6) (14.6) (.2) (.1) (-1) (10.4) (10.2) _(9.5) 23.7% 24.8% 25.1% (1.5) (1.1) (1.7) (.6) (5) (4) 21.6% 23.2% 23.0% Short-Term Liquidity Risk Ratios Current Ratio 1.4 1.5 1.3 Quick Ratio 1.0 1.0 .9 Cash Flow from Operations to Current Liabilities 66.1% 52.5% 70.9% Days Accounts Receivable 70 69 72 Days Inventory... 167 168 186 Days Accounts Payable 120 105 100 Long-Term Liquidity Risk Ratios Liabilities to Assets Ratio 72.2% 62.2% 68.0% Long-Term Debt Ratio 19.4% 18.7% 22.8% Debt-Equity Ratio 69.6% 49.5% 71.3% Cash Flow from Operations to Total Liabilities Ratio 32.6% 24.7% 33.7% Interest Coverage Ratio.. 15.6 22.6 14.0