The Practice Problem at the end of the chapter contains the financial statements and ratios for Le Chateau Inc. In Canada, Le Chateau and H&M are direct competitors in the fashion retail market for young adults.
Required:
Use the information from the Practice Problem, the financial statements of H&M in Appendix A, and the ratios calculated in problem 12-47 to answer the following questions:
a. Compare the inventory turnover and gross margin for the two companies. Are there any factors that make this comparison less reliable?
b. Compare the profitability and ROA for the two companies. What do you think explains the differences?
c. Compare the ROE and use of leverage for the two companies. Which company provides a higher return to its shareholders? Which company has more financial risk from the point of view of the shareholders?
d. Discuss the reasons doing a direct cross-sectional comparison of these two companies. Discuss the reasons for not doing one.