Bnl Profitability

Xuanxin Xu

SID 3688199870

Section 14106

Professor Randhawa

Question 1

Profitability

Net profit margin is calculated as a percentage of net income to sales, indicating how much each dollar earned contributes to actual earnings of the company. As shown in the Exhibit 1, net profit margin of BNL stores has been falling from 2008 to 2010. The negative trend of net profit margin ratio might be due to the increasing sales revenue as well as a rise in selling, general and administrative (SG&A) expenses. The increasing SG&A expenses might be caused by the bonus given to managers for motivating customers to buy on credit.

Return on Equity (ROE) is the ratio of earnings to shareholder’s equity. As illustrated in the Exhibit 1, ROE has been dropping through the time from 2008 to 2010. The drop was because of BNL’s rising borrowings of long-term debt from 2006 to 2007 as well as short-term notes payables resulted from increase interest on long-term debt.

Return on Assets (ROA) is calculated as the total of net income and interest expense after tax plus non-controlling interest in Earnings over average total assets. The declining trend of ROA demonstrates decreasing efficiency in handling assets. Especially the negative ROA in 2010 means that the company made a loss in every dollar invested in asset that year.

Turnover

Days Receivables is calculated as accounts receivable over sales. It measures how well BNL collects its credit sales. The days receivables have been declining in the period of 2008 to 2010. The decline was resulted from lower accounts receivables over the years. The improved credit collection policy might lead to better collections of A/R.

Inventory Turnover is the ratio of Cost of Goods Sold (COGS) over Ending Inventory. This ratio has been stable from 2008 to 2010. As sales amount increased every year, COGS also increased, so did inventory.

Asset Turnover is calculated by sales over assets. It indicates how efficiently BNL deploys its assets. The higher the asset turnover ratio, the better BNL uses its assets. The ratio has been slightly increasing over the three years since 2008. It has also been over 1 all the time, indicating that total assets generated value in sales more than once within one year period.

Liquidity

Current Ratio is the ratio of current assets over current liabilities. It measures BNL’s capability of paying off current debt by using current assets. The company’s rising accounts receivables result in the increasing current assets. However, since the company started borrowing a lot from 2005, it has been paying increasing interest expense and thus, more current liabilities. Since current liabilities grew more extensively than current assets, current ratio has been decreasing.