Principles of Managerial Finance 13th ed - FIN 322 - P3 -22

Debt the firm uses more debt than the average firm

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department, or credit terms that prohibit growth in sales. Debt: The firm uses more debt than the average firm, resulting in higher interest obligations that could reduce its ability to meet other financial obligations. Profitability: The firm has a higher gross profit margin than the industry, indicating either a higher sales price or a lower cost of goods sold. The operating profit margin is in line with the industry, but the net profit margin is lower than industry, an indication that expenses other than cost of goods sold are higher than the industry. Most likely, the damaging factor is high interest expenses due to a greater than average amount of debt. The increased leverage, however, magnifies the return the owners receive, as evidenced by the superior ROE. b. Fox Manufacturing Company needs improvement in its liquidity ratios and possibly a reduction in its total liabilities. The firm is more highly leveraged than the average firm in its industry and therefore has more financial risk. The profitability of the firm
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is lower than average but is enhanced by the use of debt in the capital structure, resulting in a superior ROE.
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