Harrods Sporting Goods 1) Profitability Ratios for 2004: Profit Margin= Net income / Sales 193,200 / 4,269,871 = 4.

5% Return on Assets a. Net income Total assets 193,200 / 3,170,200 = 6.1% b. (Net income / Sales) x (Sales / Total Assets) (193,200 / 4,269,871) x (4,269,871 / 3,170,200) = 6.1% Return on Equity a. Net income / Stockholders Equity 193,200 / 1,204,600 = 16% b. Return on Assets (investment) / (1 Debt/Assets) .061 / (1 1,965,600/3,170,200) = .061 / .38 = 16% Profit Ratios for 2005: Profit Margin= Net income / Sales 243,100 / 4,483,360 = 5.4% Return on Assets a. Net income / Total assets 243,100 / 3,360,650 = 7.2% b. (Net income Sales) x (Sales Total Assets) (243,100 / 4,483,360) x (4,483,360 / 3,360,650) = 7.2% Return on Equity a. Net income / Stockholders Equity 243,100 / 1,310,655 = 18.5% b. Return on Assets (investment) / (1 Debt/Assets) .072 / (1 2,049,995/3,360,650) = .072 / .39 = 18.5%

Profit Ratios for 2006: Profit Margin= Net income / Sales 200,318 5,021,643 = 4% Return on Assets a. Net income Total assets 200,318 / 3,510,110 = 5.7% b. (Net income / Sales) x (Sales / Total Assets) (200,318 / 5,021,643) x (5,021,643 / 3,510,110) = 5.7% Return on Equity a. Net income Stockholders Equity 200,318 / 1,333,800 = 15% b. Return on Assets (investment) (1 Debt/Assets) .057 / (1 2,176,310/3,510,110) = .057 / .38 = 15% 2) For all three ratios (profit margin, return on assets, and return on equity) the trends from 2004 to 2006 remains the same. All three ratios increased from year 2004 to 2005, but dramatically decreased from 2005 to 2006 dropping below the percent ratios of 2004. The increase of Profit margin indicates that Harrods sporting goods had a higher return on the sales dollar which shows good cost control, the decrease (2005-2006) of the same ratio indicates the company having a lower return on the sales dollar. Increase on return on assets signifies a more rapid turnover of assets and demonstrates efficient use of assets on the balance sheet whereas the decrease (20052006) shows non-efficient use of assets. Increase in return on equity shows that the owners of the company are more amply rewarded than other owners in the industry.

3) Profit Ratios for 2006 (Recomputed): Profit Margin= Net income / Sales 310,818 / 5,021,643 = 6.2% Return on Assets a. Net income Total assets 310,818 / 3,510,110 = 8.9% b. (Net income Sales) x (Sales Total Assets) (310,818 / 5,021,643) x (5,021,643 / 3,510,110) = 6.2 x 1.431 = 8.9% Return on Equity a. Net income / Stockholders Equity 310,818 / 1,333,800 = 23.3% b. Return on Assets (investment) (1 Debt/Assets) .089 / (1 2,176,310/3,510,110) = .089 / (1 - .620) = .089 / .38 = 23.4% Sales / Total Assets (2b) 5,021,643 / 3,510,110 = 1.43x Debt / Total Assets (3b) 2,176,310 / 3,510,110 = .62 Receivables Turnover = Sales (credit) / Receivables 2,510,821.5 398,200 = 6.3x Inventory Turnover = Sales / Inventory 5,021,643 1,057,008 = 4.8x Fixed asset Turnover = Sales / Fixed assets 5,021,643 / 1,698,968 = 3x

4) All profit ratios for all three years for Harrods Sporting Goods Company (2004-2006) continued to increase. The increase in profit margin for all three years indicates good cost control and high return on the sales dollar. Increase on return on assets shows that every year, efficient use of the assets on the balance sheet and fast turnover of assets were accomplished. Increase in return on equity signifies that year after year Harrods shareholders rewards increased as a result of a high return on total assets or a generous utilization of debt or a combination of both.

5) When comparing Harrods to the selected industry ratios for 2006 their (Harrods) numbers look pretty good. Profit margin for the industry averages around 4.51%, Harrods stands at 6.2% showing good cost control. Return on assets for the industry averages around 5.10% for part A and 1.33x for part B, Harrods stands at 8.9% for part A and 1.43x for part B showing efficient use of assets. Return on equity for the industry averages around 9.80% for part A and 0.48 for part B, Harrods stands at 23.3% for part A and .62 for part b showing higher rewards for Harrods stockholders. 6) Receivables turnover for the industry averages around 5.75x, Harrods stands at 6.3x showing that they collect their receivables slower than does the industry. Inventory turnover for the industry averages around 3.01x, Harrods stands at 4.8x showing that Harrods generates more sales per dollar of inventory; this indicates that they have in place a very strong and efficient inventory-ordering and cost-control methods. Fixed asset turnover for the industry averages around 3.20x, Harrods stands at 3x. Harrods plant and equipment ratio is low, but because of their rapid movement of inventory and accounts receivable the fixed asset turnover is relatively minor.

7) I think Becky does not have a legitimate complaint. During the last 15 years she and her husband have opened a total of 12 stores which produce $5 million in total sales and generate profit of over $200,000 every year. These figures may seem impressive to the Harrods, but on a larger scale these number are average at best due to the fact that they compete with nationally with Oshmans and the Academy and locally with Wal-Mart and Lowes. According to the book assigned to this finance course, the average customer can expect to pay 1%-2% points above prime. Paying the prime rate is only given to the banks most creditworthy customers. Right now the Harrods are paying the average rate for the average customer.