Fiscal Year 3 Fiscal Year 2
Net income $567,600 $479,500
Interest expense 18,300 22,200
Fiscal Year 3 Fiscal Year 2 Fiscal Year 1
Total assets (at end of fiscal year) $4,981,100 $4,648,900 $4,356,500
Total stockholders’ equity (at end of fiscal year) 3,304,700 3,116,600 2,735,100
Assume the apparel industry average rate earned on total assets is 8.0%, and the average rate earned on stockholders’ equity is 10.0% for the year ended April 2, Year 3.
a. Determine the rate earned on total assets for Ralph Lauren for fiscal years 2 and 3. Round to one digit after the decimal place.
b. Determine the rate earned on stockholders’ equity for Ralph Lauren for fiscal years 2 and 3. Round to one decimal place.
c. Evaluate the two-year trend for the profitability ratios determined in (a) and (b).
d. Evaluate Ralph Lauren’s profit performance relative to the industry.
Answer:
a. Rate Earned on Total Assets = Net Income + Interest Expense
Average Total Assets
Fiscal Year 3: $567,600 + $18,300
($4,981,100 + $4,648,900) ÷ 2
= 12.2%
Fiscal Year 2: $479,500 + $22,200
($4,648,900 + $4,356,500) ÷ 2
= 11.1%
b. Rate Earned on Stockholders’ Equity = Net Income
Average Total Stockholders’ Equity
Fiscal Year 3:
Fiscal Year 2:
$567,600
($3,304,700 + $3,116,600) ÷ 2
$479,500
($3,116,600 + $2,735,100) ÷ 2
= 17.7%
= 16.4%
c. Both the rate earned on total assets and the rate earned on stockholders’ equity have increased over the two-year period. The rate earned on total assets increased from 11.1% to 12.2%, and the rate earned on stockholders’ equity increased from 16.4% to 17.7%. The rate earned on stockholders’ equity exceeds the rate earned on total assets due to the positive use of leverage.
d. During fiscal Year 3, Polo Ralph Lauren’s results were strong compared to the industry average. The rate earned on total assets for Polo Ralph Lauren was more than the industry average (12.2% vs. 8.0%). The rate earned on stockholders’ equity was more than the industry average (17.7% vs. 10.0%). These relationships suggest that Polo Ralph Lauren has more leverage than the industry, on average.