Zulu is a retailer of high fashion womens clothing. Zulu has experienced modest sales growth over the
Question:
Zulu is a retailer of high fashion women’s clothing. Zulu has experienced modest sales growth over the past three years but has had difficulty translating the expansion of sales into improved profitability. Using three years’ financial statements, you have developed the following ratio calculations and industry comparisons.
Industry Averages | ||||
2018 | 2019 | 2020 | 2020 | |
Current ratio | 1.71X | 1.65X | 1.53X | 1.7X |
Quick ratio | .92X | .89X | .84X | .95X |
Average collection period | 60 days | 60 days | 67 days | 65 days |
Inventory turnover | 4.2X | 3.9X | 3.69X | 4.5X |
Fixed asset turnover | 3.2X | 3.33X | 3.57X | 3.0X |
Total asset turnover | 1.4X | 1.35X | 1.31X | 1.37X |
Debt ratio | 59.2% | 61% | 76.4% | 60% |
Times interest earned | 4.2X | 3.7X | 2.78X | 4.75X |
Gross profit margin | 25% | 23% | 20% | 22.5% |
Operating profit margin | 12.5% | 12.7% | 13.3% | 12.5% |
Net profit margin | 6.1% | 6.0% | 5.1% | 6.5% |
Return on total assets | 8.54% | 8.1% | 6.7% | 8.91% |
Return on equity | 20.93% | 20.74% | 28.4% | 22.28% |
Show the breakout of the 2020 return on equity (3-factor DuPont Identity) for both Lulu and the industry.
Based on the above breakout, in conjunction with any other ratios given, explain what major issues are contributing to Tinkerbell’s declining profitability.
Introduction to Management Accounting
ISBN: 978-0133058789
16th edition
Authors: Charles Horngren, Gary Sundem, Jeff Schatzberg, Dave Burgsta