Question

Use the financial statements of Clorox to answer the following question:

Profitability Ratios for 2003, 2004 and 2005

1. Calculate the Gross Margin (Use Gross Profit)
2. Calculate the Operating Margin (Use the Earnings from Continuing Operations before income taxes)
3. Calculate the Net Profit Margin (Use Net Earnings)
4. Comment on the profitability trends in their business.
5. 
   16 The Clorox Company Report of Independent Registered Public Accounting Firm on Condensed Consolidated Financial Statements The Board of Directors and Stockholders of The Clorox Company: We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Clorox Company at June 30, 2005 and 2004, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2005 (not presented separately herein), and in our report dated August 26, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated financial statements is fairly stated in all material respects in relation to the consolidated financial statements from which it has been derived. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of The Clorox Company's internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 26, 2005 (not presented separately herein), expressed an unqualified opinion thereon. Ernst & Young LLP San Francisco, California August 26, 2005
   

Answer 1

Calculation of Gross Margin, Operating Margin and Net Profit Margin: Particulars 2005 2004 2003 Gross Margin = Gross Profit/Sales (Net) Operating Margin = Earnings from continuing operations before income taxes/Sales (Net) Net Profit Margin = Net Earnings/Sales (Net) 43.19 43.99 45.53 16.61 18.07 18.01 24.98 13.19 12.37 Comment: Even though the Gross Profit increased year by year the Gross Margin decreased since the increase in sales and gross profit decreased. The same comes with the Operating Margin. However, in 2005 Net Profit Margin has drastically increased due to huge earnings from discontinued operations, especially from Gain on exchange.