Below are selected ratios for Manufacturers Corporation. Use this information an

Question

Below are selected ratios for Manufacturers Corporation.

Use this information answer the following questions.

Year 1 Year 2 Year 3

Net operating asset turnover 1.4 1.31 1.25

Inventory turnover 5.6 5.0 4.6

Accounts receivable turnover 12.1 11.9 12.1

Fixed assets turnover 1.3 1.29 1.29

Net operating profit margin 4.5% 4.6% 4.8%

Net operating assets/equity 2.10 1.98 1.77

EBIT/revenues 8.9% 8.6% 8.6%

Gross margin 20.1% 19.9% 19.8%

Income tax rate 35% 35% 35%

a. Calculate return on net operating assets for all three years.Identify reasons for any changes.

b. Calculate return on equity for all three years. Comment on changes.

Explanation / Answer

Year 1 Year 2 Year 3 ans a Return on Net operating assets 6.3 6.03 6.00 % Net Income/Net operating assets*100 1.4*4.5 1.31*4.6 1.25*4.8 WE have following information Net operating assets Turnover*Net operating margin=return on Net operating assets sales/NOA*Net operating income/sales The return on Net operating Income has decreased slightly from Year 1 to Year 3. So there should be efforts to use net operating assets in a better manner ans b Return on equity as per the question can be calculated as=Net operating assets/equity*Return on Net operating assetd Year 1 Year 2 Year 3 13.2 11.9 10.6 % 6.3%*2.1 6.03*1.98 6*1.77 There is decraese in return on Equity from Year 1 to Year 3. Efforts should be made to improve the performance

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