| Course | BUS 510 Managerial Accounting |
|---|---|
| Module | Module 3 |
| Paper type | Financial ratio analysis |
| Length | About 1,101 words, 7 pages |
| Format | APA 7 student paper |
| School | Aspen University |
| Program | MBA |
| Updated | October 2026 |
Free sample paper for BUS 510 Module 3
Growing Into Trouble: A Two-Year Ratio Analysis of a Marine Parts Distributor Whose Sales Rose While Its Returns Fell
Student Name
MBA Program, Aspen University
BUS 510: Managerial Accounting
Instructor Name
Month Day, Year
Growing Into Trouble: A Two-Year Ratio Analysis of a Marine Parts Distributor Whose Sales Rose While Its Returns Fell
Harbor Point Marine Supply, a composite distributor in Charleston, South Carolina, sells engine parts, electronics and hardware to boatyards, marinas and repair shops along the Southeast coast. Two years ago its owners decided to grow by carrying a wider range of inventory and extending more generous credit to boatyards. Sales rose from $8.4 million to $9.6 million, but net income fell from $460,000 to $316,000, and the company drew heavily on its bank credit line. The owners want to understand what happened. This paper analyzes the two years with financial ratios and recommends where to act.
The Figures Used
All ratios use year-end balances. In the first year, the company had total assets of $4.20 million, including cash of $420,000, receivables of $920,000 and inventory of $1.66 million, and equity of $2.00 million. In the second year, total assets were $5.40 million, including cash of $180,000, receivables of $1.32 million and inventory of $2.37 million, and equity of $2.32 million. Current liabilities rose from $1.30 million to $2.25 million, mainly because the credit line grew from $300,000 to $950,000. Cost of goods sold was $6.05 million and $7.10 million, operating income $670,000 and $560,000, and interest expense $90,000 and $160,000.
The Ratios
| Ratio | Year 1 | Year 2 |
|---|---|---|
| Current ratio | 2.31 | 1.72 |
| Quick ratio, excluding inventory | 1.03 | 0.67 |
| Days sales outstanding | 40 | 50 |
| Days of inventory | 100 | 122 |
| Gross margin | 28.0% | 26.0% |
| Net profit margin | 5.5% | 3.3% |
| Return on assets | 11.0% | 5.9% |
| Return on equity | 23.0% | 13.6% |
| Total liabilities to equity | 1.10 | 1.33 |
| Times interest earned | 7.4 | 3.5 |
Liquidity
Both liquidity ratios weakened. The current ratio of 1.72 still looks comfortable, but it is propped up by inventory, which cannot pay bills until it sells. The quick ratio, which counts only cash and receivables, fell below 1.0, meaning the company could not cover its current liabilities without selling inventory. Cash fell by $240,000 even as profit was earned, because money went into receivables and stock.
Activity
The activity ratios explain why. Days sales outstanding rose from 40 to 50, so customers are taking ten days longer to pay, a result of the looser credit terms offered to boatyards. Days of inventory rose from 100 to 122, so the average item now sits on the shelf for about four months. Growth in receivables and inventory together absorbed about $1.1 million, more than the year's profit and the larger credit line combined, which is why cash fell.
Profitability
Gross margin fell two points, partly because the company discounted slow-moving inventory and partly because larger boatyard accounts negotiated better prices. Operating costs grew faster than sales as the company added warehouse space and staff. Net margin fell from 5.5% to 3.3%, and returns on assets and equity fell by about half and by about two fifths.
Debt and Coverage
The company's reliance on debt rose modestly, from $1.10 to $1.33 of liabilities for every dollar of equity. More concerning is coverage: operating income now covers interest only 3.5 times, down from 7.4, because the credit line is larger and its rate is variable. A further fall in operating income or rise in rates would quickly tighten the margin.
The DuPont Breakdown
Return on equity can be decomposed into three parts: net profit margin, asset turnover and the equity multiplier. In the first year, a margin of 5.48% multiplied by asset turnover of 2.00 times sales to assets and an equity multiplier of 2.10 gives 23.0%. In the second year, a margin of 3.29%, turnover of 1.78 and a multiplier of 2.33 give 13.6%. The multiplier rose, which by itself would have raised returns, so the decline came entirely from lower margins and slower turnover. In plain terms, the company is earning less on each sale and needs more assets to make each sale.
Soliman (2008) found that the DuPont components carry information beyond total profitability: changes in asset turnover in particular were associated with future changes in profitability, and analysts and investors responded to them. For Harbor Point, the drop in turnover from 2.00 to 1.78 is therefore not a technical detail but an early signal of weaker results ahead unless inventory and receivables are brought under control.
What Research Says About Warning Signs
Beaver (1966) compared financial ratios of firms that later failed with those of firms that did not and found that cash flow measured against everything the firm owed was among the strongest warnings, with differences visible years before failure. Altman (1968) combined several ratios, including working capital, retained earnings, operating earnings and sales relative to total assets, into a single discriminant score for manufacturing firms. Harbor Point is not a manufacturer and is far from failure, so neither model should be applied mechanically. But both studies point to the same lesson: declining cash-based and working capital measures often precede trouble, while profit can remain positive. Harbor Point's falling quick ratio and cash balance are the numbers to watch.
Comparison With the Owners' Expectations
The owners had expected that higher sales would raise profit automatically, and in one sense they were right: gross profit in dollars grew from $2.35 million to $2.50 million. The ratios show why that was not enough. Operating costs and interest grew faster than gross profit, and the assets needed to support each dollar of sales increased. Growth that requires more working capital per dollar of sales must earn a higher margin to pay for itself, and Harbor Point's growth earned a lower one.
Priorities
First, the company should restore collection terms to 30 days for new boatyard accounts and follow up on balances older than 45 days, aiming to bring days sales outstanding back to about 40, which would release roughly $260,000 of cash. Second, it should review its slow-moving inventory, return or discount items that have not sold in six months and set reorder points by item, aiming for about 100 days of inventory. Third, it should use the released cash to reduce the credit line, which would lower interest expense and restore coverage. Margin improvement through pricing reviews with large accounts should follow once working capital is under control.
Conclusion
Harbor Point grew its sales but financed the growth with slower collections, heavier inventory and a larger credit line, and its returns fell as a result. The ratios show where the problem lies, and the DuPont breakdown confirms that weaker margins and slower asset turnover, not debt, drove the decline. Research on warning signs explains why the owners should act now, while profit is still positive.
References
Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance, 23(4), 589-609. https://doi.org/10.1111/j.1540-6261.1968.tb00843.x
Beaver, W. H. (1966). Financial ratios as predictors of failure. Journal of Accounting Research, 4, 71-111. https://doi.org/10.2307/2490171
Soliman, M. T. (2008). The use of DuPont analysis by market participants. The Accounting Review, 83(3), 823-853. https://doi.org/10.2308/accr.2008.83.3.823
What the BUS 510 Module 3 instructions ask for
BUS 510's catalog entry centers on reading statements to judge profitability, so a ratio module usually asks students to compute and explain ratios for a company. Follow your classroom's Module 3 instructions on which ratios to use; this example covers four groups over two years. Compute ratios from stated figures and say whether you used year-end or average balances. Present them in a table for easy comparison. Interpret each group, explaining what changed and why, rather than only reporting numbers. Use a decomposition such as DuPont to trace return on equity to its drivers. Compare with prior years, industry figures or both. Support your interpretation with research where helpful. Finish with recommendations that address the weakest ratios.
Inside the BUS 510 Module 3 example
The opening sets the scene: Harbor Point Marine Supply grew revenue from $8.4 million to $9.6 million while net income fell from $460,000 to $316,000. A table lists the current and quick ratios, days sales outstanding, days of inventory, gross and net margins, return on assets and equity, debt to equity and times interest earned for both years, using year-end balances. Interpretation follows by group: liquidity weakened, collections slowed from 40 to 50 days, inventory days rose from 100 to 122, and margins narrowed. The DuPont section multiplies margin, asset turnover and the equity multiplier to show that falling margin and turnover drove the decline. Soliman, Beaver and Altman's research follows, and the conclusion sets priorities.
BUS 510 Module 3 rubric: what earns full marks
Ratio analyses in an MBA accounting course are marked first on correct computation and then on interpretation. Every ratio here can be recomputed from the figures in the opening table, and the paper states that it used year-end balances. The interpretation explains causes, for example linking the fall in the quick ratio to the line of credit used to fund inventory, which is where most interpretation marks are earned. The DuPont breakdown shows the arithmetic for both years, so the grader can confirm that the product equals return on equity. Research is used to judge which ratios matter most: Soliman's article in The Accounting Review on the DuPont parts, Beaver's Journal of Accounting Research study and Altman's Journal of Finance article on distress prediction. Recommendations follow from the weakest ratios.
Common BUS 510 Module 3 mistakes, and how to avoid them
The most frequent problems in Module 3 are calculation errors and ratios presented without explanation. Recompute each ratio and state your formula choices, such as year-end or average balances. Interpret changes by connecting ratios to each other: slower collections and higher inventory together explain tighter liquidity. Avoid declaring a ratio good or bad without a benchmark, such as the prior year or an industry figure. Do not overload the paper with every possible ratio; choose those that tell the company's story. Explain return on equity through its components rather than in isolation. When you use distress models, remember that they were built on particular samples and are signals, not verdicts. End with actions that target the specific weaknesses you found, and say which one matters most.
Write yours, or have the desk draft it
This paper is an original model document written by our desk, not a submitted student paper and not an official Aspen University document. Read it for the moves, then write your own to the instructions in your classroom. If you want one built to your exact prompt and rubric, the first custom sample is free and arrives in 24 to 48 hours.
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BUS 510 Module 3 questions, answered
What does BUS 510 Module 3 usually ask for?
Aspen's BUS 510 covers financial ratio analysis in this module, so computing and interpreting ratios for a company across periods is typical. Your classroom prompt lists the ratios required.
What is DuPont analysis?
A breakdown of return on equity into net profit margin, asset turnover and the equity multiplier, showing whether returns changed because of profitability, efficiency or financing.
Should I use year-end or average balances?
Either is acceptable if you state your choice and apply it consistently; averages smooth out year-end swings in growing companies.
Where can I find a free BUS 510 Module 3 sample paper?
The full analysis is above: a marine parts distributor's ten ratios over two years in a table, a DuPont breakdown and research on which ratios signal trouble.
Which ratios best predict financial distress?
Early research by Beaver found cash flow relative to total debt was a strong predictor, and Altman combined several ratios into the Z-score for manufacturing firms.