Harrods Sporting Goods

1. Compute the profitability ratios for Profit Margin, Return on Assets (Net Income / Assets) and Return on Equity (Net Income/ Total Equity). Also compute the profitability ratios using the DuPont Analysis for Return on Assets and Return on Equity. The profitability ratios should be shown for all three years.

2. Write a brief one-paragraph description of any trends that appear to have taken place over the three-year time period.

3. In examining the income statement, note that an extraordinary loss of $170,000 was reported in 2003. This might have represented uninsured losses from a fire, a lawsuit settlement, etc.,etc. It probably does not represent a recurring event or affect the earnings capability of the firm. For that reason, the astute financial analyst (YOU!) might add back in the extraordinary loss to gauge the true operating earnings of the firm. Since it was a tax-deductible item, we must first multiply by (1 – tax rate) before adding it back in.* The tax rate was 35 percent for the year.

$170,000 Extraordinary Loss

.65 (1 – tax rate)

$110,500 Aftertax addition to profits from eliminating

the extraordinary loss from net income.

The more representative net income number for 2003 would now be:

Initially reported (see above) $200,318

Adjustment for extraordinary loss being eliminated: 110,500

Adjusted net income $310,818

Now, based upon the adjusted net income figure of $310,818, re-compute the profitability ratios including

the ratios using the DuPont Analysis for 2003.

4. Now, with the adjusted net income numbers as part of the ratios for 2003, write a brief one-paragraph description of trends that appear to have taken place over the three-year time period (refer back to the data in Question 1 for 2001 and 2002).

5. Complete the financial analysis, using the revised profitability ratios for 2003 that you developed in Question 3, for Harrod’s Sporting Goods using...