Profitability Ratios Use the following information from a balance sheet and an i

Question

Profitability Ratios

Use the following information from a balance sheet and an income statement.

Compute the (1) profit margin, (2) asset turnover, (3) return on assets, (4) debt to equity ratio, and (5) return on equity. (The previous year's total assets were $200,000, and stockholders' equity was $140,000.) Round your answers to one decimal place.

Total assets $240,000 Total liabilities 60,000 Total stockholders' equity 180,000 Net sales 260,000 Cost of goods sold 140,000 Operating expenses 80,000

Explanation / Answer

1. Profit margin = net income / net sales

net income = sales - cost of goods sold - operating expenses

= 260000 - 140000 - 80000 = 40000

Profit margin = 40000 / 260000 = 0.15

2. Asset turn over ratio = net sales / average total assets

= 260000 / 200000 + 240000 / 2

= 260000 / 220000 = 1.18

3. Return on assets = net income / total assets

= 40000 / 240000 = 0.16 or 16.67%

4. Debt to equity ratio = long term debt / share holders fund

= 60000 / 180000 = 0.33

5. Return on equity = net income / shareholders equity

= 40000 / 180000 = 0.22.

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