eSecure https:/ing.cengage.com/static/nb/ul/index.html?nbld-851105&nbNodeld-3280

Question

eSecure https:/ing.cengage.com/static/nb/ul/index.html?nbld-851105&nbNodeld-32808660; MINDTAP Assignment 04-Analysis of Financial Statements 5. Profitability ratios Profitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm. Your boss has asked you to calculate the profitability ratios of Randall and Arts Inc. and make comments on its second-year performance as compared to its first-year performance. The folowing shows Randall and Arts Inc.'s income statement for the last two years. The company had assets of $10,575 million in the first year and $16,916 million in the second year. Common equity was equal to $5,625 million in the first year, and the company distributed 100% of its earnings out as dividends during the first and the second years. In addition, the firm did not issue new stock during either year. Randall and Arts Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 5,715 4,500 1,120 1,040 180 1,406 1,220 4,3093,280 426 3,727 2,854 1,491 1,142 Net Sales Operating costs except depreciation and amortization Depreciatior and amortization Total Operating Costs Operating Income (or EBIT) Less: Interest Earnings before taxes (EBT) 286 582 s: Taxes (40%) Net Income 2,236 1,712 alculate the profitability ratios of Randall and Arts Inc. in the following table. Convert all calculations to a percentage rounded to two decimal places.

Explanation / Answer

Operating Margin = Operating Income/Sales

For Year 2, Operating Margin = 4,309/5,715 = 75.40%

Profit Margin = Net Income/Sales

For year 1, profit margin = 1,712/4,500 = 38.04%

Return on total assets = Net Income/Assets

For Year 2, ROA = 2,236/16,916 = 13.22%

Return on Equity = Net Income/Equity

For Year 2, ROE = 2,236/5,625 = 39.75%

BEP = EBIT/Total Assets

For Year 1, BEP = 31.02%

Multiple Choice Question:

Option 1 and Option 3 are correct - Net profit margin signifies % of net income per total sales. So the given statement 1 is correct. Statement 3 is also correct as operating margin = EBIT/sales and Net profit margin = Net income/sales. Net Income = EBIT - Interest - Taxes. If the EBIT as % of sales increases, but Net Income as % of sales decreases, it means, interest and taxes are the spoilsport factors.

Option 2 and Option 4 are incorrect - Higher ROA implies either the net income has increased or assets have declined. So 2nd statement is incorrect. Issuance of common stocks would increase common equity, which would decrease the ROE for company if net income remains at same level. Hence statement 4 is incorrect.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.