CALCULATING AND INTERPRETING PROFITABILITY RATIOS. Hasbro is a leading firm in the toy, game, and amusement industry. Its promoted brands group includes products from Playskool, Tonka, Milton Bradley, Parker Brothers, Tiger, and Wizards of the Coast. Sales of toys and games are highly variable from year to year depending on whether the latest products meet consumer interests. Hasbro also faces increasing competition from electronic and online games. Hasbro develops and promotes its core brands and manufactures and distributes products created by others under license arrangements. Hasbro pays a royalty to the creator of such products. In recent years, Hasbro has attempted to reduce its reliance on license arrangements, placing more emphasis on its core brands. Hasbro also has embarked on a strategy of reducing fixed selling and administrative costs in an effort to offset the negative effects on earnings of highly variable sales. Exhibit 4.28 presents the balance sheets for Hasbro for the years ended December 31, Year 1 through Year 4. Exhibit 4.29 presents the income statements and Exhibit 4.30 presents the statements of cash flows for Year 2 through Year 4.
Required
a. Exhibit 4.31 presents profitability ratios for Hasbro for Year 2 and Year 3. Calculate each of these financial ratios for Year 4. The income tax rate is 35 percent.
b. Analyze the changes in ROA and its components for Hasbro over the three-year period, suggesting reasons for the changes observed.
c. Analyze the changes in ROCE and its components for Hasbro over the three-year period, suggesting reasons for the changes observed.
Text Book: Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective By James Wahlen, Stephen Baginski, Mark Bradshaw.