In 1988, LA Gear had a return on equity (ROE) of 49.45%, which decreased to 15.22% in 1990. Similarly, profitability (net income/sales) dropped from 9.8% in 1988 to 3.47% in 1990. However, asset turnover improved from a ratio of 1.69 to 2.48 due to a fourfold increase in sales and a comparatively smaller rise of about 2.7 times in total assets.
The gross profit margin for LA Gear has declined from 42.29% in 1988 to 34.41% in 1990, and the operating profit margin has dropped from 18.52% to 7.75%. This decrease is due to a significant rise in operating expenses. The net profit margins have also decreased from 9.85% to 3.47%, as a result of lower gross profit margins and higher expenses. It is important to mention that all three profit margin factors (net, gross, and operating) are currently below industry standards.
La Gear’s total asset turnover has improved from 1.69 to 2.48 as a result of sales growing faster than inventory levels. Inventory turnover has also risen from 1.94 to 3.68, although it remains below industry standards. The slow turnover of inventory might be attributed to having outdated stock. The average collection period decreased from 1988 to 1989, but slightly increased in 1990.
Despite improving its asset efficiency, LA Gear has been unable to enhance its return on equity (ROE). However, both profitability and leverage have decreased. While assets to equity have shown a decrease since 1988, they still remain above the average. This rise in debt has resulted in an increase in inventory. Times interest earned has fallen from 10.10 to 3.77, significantly below industry standards.
Although LA Gear’s short-term liquidity, measured by the current ratio, has improved, it remains below acceptable levels. This is primarily because there has been a rise in current assets like inventory and receivables.
LA Gear may enhance inventory turnover by loosening credit terms and extending the collection period. They can also improve inventory turnover to meet industry standards by disposing of old merchandise. Additionally, boosting profit margins can be achieved by reducing operating expenses.
