Financial Ratios

This document provides an in-depth analysis of financial ratios, including profitability ratios, trends, adjusted profitability ratios, and asset utilization ratios. It discusses the performance of Harrod's Sporting Goods in comparison to industry averages and highlights areas of improvement. The document also emphasizes the importance of using adjusted figures for a fair representation of financial performance.

Running Head: FINANCIAL RATIOS
FINANCIAL RATIOS
NAME OF STUDENT
NAME OF UNIVERSITY

2
FINANCIAL RATIOS
1.Profitablity ratios
Harrod's Sporting
Goods
2013 2014 2015
Industry
average
Profit margin = Net profit
4,52
%
5,42
%
3,99
% 4,51%
Sales
Return on assets = Net income 6,1% 7,2% 5,7% 5,10%
Total assets
= Net income x Sales 6,1% 7,2% 5,7% 5,10%
Sales X Total assets
Return on Equity = Net income
16,0
%
18,5
%
15,0
% 9,8%
Stockhoders equity
= Return on assets
16,0
%
18,5
%
15,0
% 9,8%
(1-debt/assets)
2. Trends on profitability ratios.
These are ratios showing the profit as a percentage against the major drivers in generating
sales (Bragg,2018). A review of these ratios is as analysed below.
The profit margin trend across the three years indicates an increase in 2014 as compared to
2013 and then decreased in year 2015. The 2015 profit margin of 4% was below the industry
average of 4,5%. A review of revenues and expenses show that in 2015 the expenses were
unusually higher than the previous years as compared with the respective revenues. This is
despite the increase in sales in 2015 as compared with the year 2014.
Return on assets also followed the same trend as the profit margin where it dipped to the
lowest level in 2015. However, the return was higher than the industry average of 5,1%.

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FINANCIAL RATIOS
Return on equity shows the highest return was in 2014. The trend was also similar where the
rate dipped in 2015 as the profit margin dipped to 15% from 18,5% in 2014. The rate was
however way above the industry average of 9%.
3.Adjusted profitability ratios
Harrod's Sporting Goods
2013 2014 2015
Industry
average
Profit margin = Net profit 4,52% 5,42% 6,19% 4,51%
Sales
Return on assets = Net income 6,1% 7,2% 8,6% 5,10%
Total assets
= Net income x Sales 6,1% 7,2% 8,6% 5,10%
Sales X Total assets
Return on Equity = Net income 16,0% 18,5% 21,5% 9,8%
Stockholders’
equity
= Return on assets 16,0% 18,5% 21,5% 9,8%
(1-debt/assets)
4.Trends on profitability trend after adjustment
The impact of the adjustment has been to increase the percentages by 3 points. This
increment has led to the 2015 ratios being higher than the 2014 ratios. All profitability ratios
are increasing on a year to year basis. This shows that the business is improving from a
profitability perspective. The business is also outperforming the industry on all the
profitability ratios for year 2015. This shows that one-off events should be isolated and
necessary adjustments made. The adjusted figures should then be used to compute the ratios.

4
FINANCIAL RATIOS
The adjusted figures will then form a fair representation of financial performance.
5, Profitability trends against industry averages.
All the profitability ratios were higher than the industry averages for the year 2015. The
return on equity was more than two times the industry average for 2015.
Asset turnover is a measure of efficiency of assets in generating sales. In our case the 2015
ratio of 1,4 against the industry average of 1,3 indicates that the business is generating more
sales from its assets as compared to the industry average. This is a good thing even if the
difference is marginal.
However, for debt to total assets indicates that in 2015 Harrod’s has a relatively higher debt
burden in relation to total assets of 0,62 as compared with the industry average of 0,48. This
is an indication that the debt is significantly higher as compared with the industry average. A
review of the financials indicate that Harrod’s increased its debt significantly in 2015. This is
may be interpreted to mean that the company could be struggling to meet its obligations from
normal business proceeds.
6. Asset utilisation ratios
201 2014 201 Industry

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FINANCIAL RATIOS
3 5 average
Asset turnover = Sales 1,39 1,33
Total assets
Debt to total assets = Debt 0,60 0,48
Total assets
Recievable turnover = Credit sales 6,31 5,75
Recievables
Inventory turnover =
Cost of goods
sold 3,07 3,01
Inventory
Fixed asset turnover
turnover = Sales 2,77 3,2
Fixed Assets
7.Asset utilisation ratios

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FINANCIAL RATIOS
The asset utilisation ratios which measure the efficiency of generating sales from assets
("Asset Turnover Ratio | Analysis | Formula | Example", 2019). For the period 2015 and compared
against the industry averages show that the receivable turnover is higher than the industry
which is not desirable.
The inventory turnover is also marginally higher than the industry average which is not
desirable.
The fixed asset turnover is less than industry average. this is not desirable as the industry is
more sales from the fixed assets as compared to Harrods
8.Conclusion
The profitability ratios outperform those of the industry. However, these alone cannot be used
to make conclusions on how the business is being run. Asset utilisation ratios point to
Harrod’s being inefficient in generating sales from its assets as compared to the industry
average. The percentage increase by the bankers is justified as they classify Harrod’s business
as not efficient and consequently have risked it upwards.
References

7
FINANCIAL RATIOS
Asset Turnover Ratio | Analysis | Formula | Example. (2019). Retrieved
From https://www.myaccountingcourse.com/financial-ratios/asset-turnover-ratio
Bragg, S. (2018). Profit ratio | Profit margin ratio. Retrieved from
https://www.accountingtools.com/articles/profit-ratio-profit-margin-ratio.html