Ethan Allen Inc. Equity Multiplier

The furniture company's profit margins for the first quarter in the fiscal year 2019-2020 and 2020-2021 are computed below. 

The profit margin, computed by dividing the net income by aggregate sales revenue, is a part of the return on equity under DuPont analysis. It is a useful indicator of profitability. Ethan Allen Interiors Inc.'s profit margin ratio reduced from 8.11% in the first quarter of the fiscal year 2019-2020 to 6.19% in the first quarter fiscal year 2020-2021. Both the entity’s sales revenue and net income reduced between the two periods. However, the sales revenue reduced to a greater extent than the net income. Such a huge decrease contributed to the decrease in the profit margin by 1.92%. The sales revenue reduced due to a decrease in production and supply chain interruptions caused by COVID-19. The reduction in the metric depicts a decrease in the entity’s profitability. The reduced profit margin indicates that Ethan Allen Interiors translated lesser of its sales into profit in 2020-2021 compared to 2019-2020. The decrease in the profit margin has a negative impact on the return on equity, given that there exists a direct connection between the two metrics. The continued decrease in the profit margin is unfavorable in the eyes of investors and shareholders. Potential investors are likely to shy away from investing in Ethan Allen Interiors due to the low potential return on equity caused by the low profit margin. In addition, the current shareholders are likely to sell their stake in the company to recoup their money since the entity’s stock price is likely to reduce with the continued decrease in the profit margin. Both parties are keen on an increase in the profit margin since it means an increase in returns.