A Case of Financial Ratios That Can Inadvertently Mislead

Martin Gosman (), Mathius Gazi () and Akiva Lind ()
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Martin Gosman: Department of Economics, Wesleyan University
Mathius Gazi: Department of Economics, Wesleyan University
Akiva Lind: Department of Economics, Wesleyan University

No 2024-005, Wesleyan Economics Working Papers from Wesleyan University, Department of Economics

Abstract: In this case, a new investment group selects Burlington Stores as the off-price retailer to include in its stock portfolio, impressed with Burlington’s reporting of a much higher gross-profit percentage than that of its peers and the firm’s 443% return on stockholders’ equity (ROE), fifth highest among the Fortune 500. After observing one year later that Burlington’s stock performance was similar to that of its peers, Ross Stores and TJX, the group considers the factors that could have falsely suggested superior earning power on behalf of Burlington. In the process, they come to realize the challenges that can exist when comparing firms on the basis of their gross-profit percentages and returns on stockholders’ equity. In a teaching note that follows, questions enable students to revisit key points raised in the case as they examine financial-statement disclosures for fourteen additional retailers.

Keywords: ratio comparisons of firms; gross-profit percentage; return on stockholders’ equity (search for similar items in EconPapers)
Pages: 10 pages
Date: 2024-05
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Forthcoming in Business Education Innovation Journal, June 2024

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