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ACC 230 Week 8 CheckPoint 2: Interpreting Financial Ratios

Interpreting key financial ratios for decision-making.

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ACC 230 Week 8 CheckPoint 2: Interpreting Financial RatiosACC 230Week8CheckPoint 2: Interpreting Financial Ratios· Resource: Ch. 6 of Understanding Financial Statements· Due Date: Day 4 [Individual forum]· Complete Problem 6.2 on p. 230(Ch. 6). Submit your answer in 200 to 300 words.From the data it is evident that Luna lighting has a modest increase in sales. This isshown by the inventory turn over, which has increased from 8.1 to 8.3 times and isequal to the industrial norm. The business has failed to achieve the levels ofprofitability that other businesses in the same industry have managed and there areseveral reasons to back this statement. Luna's gross margins of 43% throughout thethree years are better than that of the industry but it seems that Luna is incurring aconsiderable amount of operating expenses as well as high interest costs, whichmight belong to debt taken for the medium to short term. This fact is backed up bythe operating profit margin, which has fallen from 8 to 6.3% in two years. Suchdrastic falls between the two ratios can only occur when there are increasingoperating expenses. A fall in the net profit margin also suggests that there arehigher interest costs being serviced by the business. The same factor is also backedup by fixed charge coverage, whichhas fallen from 5.5 to 4%. Another reason forpoor profitability is that the fixed assets of the business are not being properly usedto generate sales and the debt taken up is also not being utilized to good effect. Thelow fixed asset turnover is evidence of poor asset utilization and the low return onequity is evidence of poor debt utilization, since return on equity is the product ofprofitability, asset turnover and use of debt/equity mix. Since the asset turnoverand profit margins are already low,there must be a poor debt/equity mix so that alow return on equity figure is obtained. From this we conclude that higher

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Document Details

University
Hult International Business School
Course
ACC 230
Subject
Accounting

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