Written ROE Exam 1 William Boswell

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Boswell 1 William Boswell Dr. Blazer BUAD 341 02/20/2022 Exam 1: Avery Corp ROE Decomposition OVERALL: Avery Corp’s ROE increased substantially over the past three years from 17% in 2019 to 21% in 2021 but, still was below the industry average of 24%. The cause of this increase comes from a decrease in Avery Corp’s profit margin and an increase in their asset turnover. These were offset by the increase in their financial leverage. Avery Corp’s net profit margin diminished from 8.07% to 6.89%, which is not a huge drop off over three years, they still were not near the industry average of 9.71%. Financial leverage rose from 1.51 in 2019 to 1.79 in 2021. This is above the industry average of 1.54 so, they are taking on more financial risk. Avery Corp’s asset turnover has increased from 1.47 in 2019 to 1.73 in 2021. Their asset turnover as of 2021 is better than the industry average of 1.67. PROFITABILITY: Regardless of Avery Corp’s sales holding steadily in an upwards direction, Avery Corp’s net profit margin decreased from 8.07% to 6.89%, which is below the industry average of 9.7%. Contributing to this decline are the increasing costs of good sold, SG&A, and the interest expense as a percentage of sales. Two offsetting factors were the decline of the tax expense and the depreciation expense as a percentage of sales. Avery Corp’s gross profit margin declined from 55.30% in 2019 to 54.70% in 2021 and remained below the industry average of 58%. SG&A as a percentage of sales rose from 13.04% in 2019 to 15.21% in 2021, which is no where near the industry average of 40%. Interest expense increased as a percentage of sales from 0.62% in 2019 to 0.99% in 2021, which is roughly above the industry average. This could be due to

Last Name 2 higher borrowing costs but, their financial leverage has risen over the past three years. A couple factors that offset these increasing expenses are the depreciation expense and the tax expense. Avery Corp’s depreciation expense decreased from 4.16% in 2019 to 3.92% in 2021, but still very much above the industry average of 2.10%. The tax expense for Avery Corp decreased as well from 4.35% in 2019 to 3.40% in 2021. This puts them below the industry average of 5.23%. This is due to Avery Corp’s decreased profitability and lower average tax rate, which dropped from 35% to 33%. ASSEST TURNOVER: Avery Corp’s decreasing profit margin has been contributed to by an increased asset turnover ratio. Avery Corp’s asset turnover increased from 1.47 in 2019 to 1.73 in 2021, which is now above the industry average of 1.67. Accounts receivable and inventories, which make up for roughly 30% of their total assets but, are not the primary source of improvement for their company. Increasing levels of cash have also contributed to the overall trend, while inventory turnover is an offsetting factor. Avery Corp has condensed its A/R collection period from 47 days to 37 days, which is well below the industry average of 55 days meaning Avery has had good control over its inventory for some time now. Avery Corp’s increased its inventory period from 63 days to 74 days, which is not near the industry average of 104 days. Avery Corp might be raising their prices which is offsetting the inventory turnover. Also, offsetting to Avery Corp’s improved turnover ratio is its increasing cash as a percentage of sales, day’s sales in cash has climbed from 6.30 days to 9.20, which is improvement towards the industry average of 24 days. However, this means that Avery Corp has liquidity issues. To what is contributing to the trend is Avery Corp’s increasing fixed asset turnover. Fixed asset turnover

Last Name 3 increased from 2.30 times in 2019 to 3.00 in 202. With an industry average of 4.76, this increased is expected to continue. FINANCIAL LEVERAGE: Avery Corp’s has decided to increase its financial leverage. Its asset to equity ratio increased from 1.51 in 2019 to 1.79 in 2021, which is well above the industry average of 1.54. On most occasions, an increase in financial leverage indicates more financial risk, which is causing Avery Corp to have some liquidity problems.

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