Using the information provided in Case 5.6 write a memo to your manager, the chief operating officer of Luna Lighting. Summarize the information from the 3 years financial statements, the ratio calculations, and industry comparisons provided in the case to present possible solutions to the company's profitability problems. Be sure to conclude with projecting the future success of the company based on your findings.

CHAPTER 5 The Analysis of Financial Statements 251 5.6. Luna Lighting, a retail firm, has experienced modest sales growth over the past three years but has had difficulty translating the expansion of sales into improved profitability. Using three years' financial statements, you have developed the following ratio calcula- tions and industry comparisons. Based on this information, suggest possible reasons for Luna's profitability problems. Industry Averages 2016 2016 2015 2014 2.2x 47 days Current Average collection period Inventory turnover Fixed asset turnover Total asset turnover Debt ratio Times interest earned Fixed charge coverage Gross profit margin Operating profit margin Net profit margin Return on assets Return on equity 2.3X 45 days 8.3X 2.7X 1.1X 50% 8.1X 4.0X 43% 6.3% 3.5% 3.7% 7.4% 2.3x 46 days 8.2X 3.0x 1.2X 50% 8.2x 4.5X 43% 7.2% 4.0% 5.0% 9.9% 8.1X 3.3X 1.3X 50% 8.1X 5.5X 43% 8.0% 4.3% 5.7% 11.4% 2.1X 50 days 8.3X 3.5X 1.5X 54% 7.2x 5.1X 40% 7.5% 4.2% 6.4% 11.8% CHAPTER 5 The Analysis of Financial Statements 251 5.6. Luna Lighting, a retail firm, has experienced modest sales growth over the past three years but has had difficulty translating the expansion of sales into improved profitability. Using three years' financial statements, you have developed the following ratio calcula- tions and industry comparisons. Based on this information, suggest possible reasons for Luna's profitability problems. Industry Averages 2016 2016 2015 2014 2.2x 47 days Current Average collection period Inventory turnover Fixed asset turnover Total asset turnover Debt ratio Times interest earned Fixed charge coverage Gross profit margin Operating profit margin Net profit margin Return on assets Return on equity 2.3X 45 days 8.3X 2.7X 1.1X 50% 8.1X 4.0X 43% 6.3% 3.5% 3.7% 7.4% 2.3x 46 days 8.2X 3.0x 1.2X 50% 8.2x 4.5X 43% 7.2% 4.0% 5.0% 9.9% 8.1X 3.3X 1.3X 50% 8.1X 5.5X 43% 8.0% 4.3% 5.7% 11.4% 2.1X 50 days 8.3X 3.5X 1.5X 54% 7.2x 5.1X 40% 7.5% 4.2% 6.4% 11.8%