Harrod’s Sporting Goods Case 1
Ratio Analysis
Purpose: The case allows the student to examine ratio analysis within the context of a customer-banking
arrangement. The firm has a disagreement with the bank over how much it should be paying in relation to
prime (no prior knowledge of banking is required for the case). An item of particular interest is the impact
of an extraordinary loss on the firm’s income statement. It has a major effect on the analysis of the
company. Industry comparisons also are utilized.
Relation to Text: The case should follow Chapter 3.
Complexity: The case is moderately complex. It should require 1 to 1½ hours.
Solutions
1
.
Ratios 2013 2014 2015
Sales
Total assets
Stockholder’s equity
2
Harrod’s has suffered a sharp decline in its profit margin, particularly between 2014 and 2015 (5.42%
3
.
2013 2014 2015
Sales
Total assets
Stockholder’s equity
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
(1 – debt / total assets) (1 – .620) (1 – .610) (1 – .620)
4
After eliminating the effect of the nonrecurring extraordinary loss, the trend is clearly up over all three
5
.
Harrod has a clear superiority in the profit margin (6.19% vs. 4.51%). This is further enhanced by a more
rapid asset turnover (1.43 vs. 1.13) to give an even more superior return on total assets (8.85% vs. 5.1%).
6
.
Ratios 2015 Industry
Fixed assets
Harrod’s is clearly superior to the industry in receivables turnover (6.31 vs. 5.75) and inventory turnover
(4.75 vs. 3.01) and this more than compensates for a lower sales to fixed assets ratio (2.77 vs. 3.20).
7
.
Becky would appear to have strong grounds for a complaint. It appears that the banker was using
unadjusted income statement numbers to arrive at the conclusion that Harrod’s was on a downward trend
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.