in both coverage ratios.3 The profitability ratios, however, tell a different story and indicate an area that the firm must focus on improving. Gross profit margin, net profit margin, and ROE improved year over year, while operating margin and ROA had slight deteriorations. The compelling issue is that for 2013, the firm was below industry standards for all profitability ratios. Operating margin and net profit margin were 5.2 times and 10.2 times, respectively, higher for the industry than for Old Pueblo Lithographers. Since gross profit margin was only slightly below industry averages, a close examination of expenses below the gross profit line is warranted, including SG&A and interest expense.Table 4.1 Note: ROA = return on assets; ROE = return on equity.a.Source: Almanac of Business and Industrial Financial Ratios, 2013.b.Based on 45 employees.
4 The management efficiency ratios paint a mixed picture and highlight areas for improvement. Receivables turnover and, in turn, days sales outstanding deteriorated in the past year, pushing days sales outstanding to over twice the industry average. The same is true for inventory turnover and days of inventory, although there was a slight improvement in the firm's year-over-year performance. This indicates that the firm must do a better job of handling its current assets. The accounts payable turnover is slightly below industry average and therefore in an ideal position. Total asset turnover improved slightly in the past year but still trails the industry substantially. Finally, the sales to employee ratio showed improvement year over year and is now even higher than the industry, a positive sign for the firm's use of human capital.
Appendix
a. Includes lease payments of $91,028 and $84,595 for 2013 and 2012, respectively.
b. The firm's tax rate is $30,132/$77,474 = 38.89%.
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