The first question to be answered is the profitability of Sample Co.. Using the Dupont Model, return on investment (ROI) for Sample Co. is 13.1% in 2000 and 21.6% in 2001, for an increase of 7.9%, the margin is (net income/sales) 8.9% in 2001 and 5.9% in 2000 for an increase of 3% and turnover (sales/average total assets) is 2.43 in 2001 and 2.20 in 2000 for an increase of 0.23. “…for most American merchandising and manufacturing companies, is between 7% and 10%. Average margin, based on net income, ranges from about 7% to 10%. Using operating income, average margin ranges from 10% to 15%. Asset turnover is usually about 1.0 to 1.5.” (University).

Another profitability ratio is return on equity (ROE). In 2000, the ROE for Sample Co. is 10.4%, and 25.6% in 2001, for a

“…firms within a given industry may vary considerably over time in terms of their relative scale of operations, life-cycle stage of development, market segmentation strategies, cost and capital structures, selected accounting methods, or a number of other economic factors—cross-industry ratio comparisons are even more problematic.” (University)

Overall Sample Co. sales growth of 20% from 2000 to 2001 is impressive, but in consideration of the significant increase in debt, concern about growing leverage is a concern and issues of liquidly are apparent. This increase in debt is a risk, but if managed could bring rewards to the company’s bottom line. “Because the risk/reward tradeoff is real and returns are generated by managing risk, not by eliminating them (Zolkos).” It could be interpreted by the financial that Sample Co. is actively growing and leveraged assets to finance the growth. The number of days’ sales in accounts receivable is of major concern for the company’s inventory efficiency and cash flow.

3) How would your assessment criteria change if the company were:

Leverage is area of evaluations of Sample Company’s condition. In 2000 the debt/equity ration is at 36.1% and in 2001 is 47.5%, or an 11.4% increase. On the Consolidated Financial Position statement a long-term debt increase of $666 million and on the Consolidated Statement of Cash Flows a significant increase in short-term debt of $449 million are noted. Sample Co. did invest $300 million in expenditures for land, buildings, machinery, and equipment in 2001, but that does not account for the significant increase in debt. The Consolidated Statement of Cash Flows does not express if these investment a

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