From looking at the ratio calculations Luna has a few things they could work on to help their profitability problems. I’ll start with looking at their operating profit margin which is steadily declining while gross profit is consistent indicating a large increase in operating expenses that have grown more than the percentage increase in sales, which in turn affects overall profit. Luna’s net profit margin return on assets is suffering consistently as well, but this is part of the decline in operating profit. The total asset turnover is declining indicating that the asset utilization rate is declining with it. Operating profit is also the reason why the return to equity is suffering constant losses too which makes Luna’s debt ratio at 50% which is scary number in business. You can take from this analysis that we can conclude the main reason for Luna’s profitability problems is largely to the increase in operating profits. They should consider looking into asset utilization, discontinued operation, an income from an outside source or effect of extraordinary items. Luna should develop a system to better help them keep track of their expenses and put forth any addition expensed to increase sales and promote efficient use of the company’s resources as well as avoid any unnecessary expenses. Profitability ratios are important to an organization because they help measure an originations ability to generate profit for a period in time. There are a few ways to measure profitability ratios: Gross profit margin is calculated by gross profit margin divided by the sales; Operating profit margins are calculated by operating profit margin divided by sales; Net profit margin is calculated by net profit margin divided by sales; Return of assets calculated by net profit dived by average total asset; Return of equity is calculated by net profit divided by total equity.
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