Question

Return Ratios and Leverage

The following selected data are taken from the financial statements of Cedar Industries:

Sales revenue		$663,000
Cost of goods sold		387,000
Gross profit		$276,000
Selling and administrative expense		100,000
Operating income		$176,000
Interest expense		50,000
Income before tax		$126,000
Income tax expense (40%)		50,400
Net income		$75,600
Accounts payable		$45,000
Accrued liabilities		70,000
Income taxes payable		10,000
Interest payable		25,000
Short-term loans payable		150,000
Total current liabilities		$300,000
Long-term bonds payable		$500,000
Preferred stock, 10%, $100 par		$250,000
Common stock, no par		600,000
Retained earnings		350,000
Total stockholders' equity		$1,200,000
Total liabilities and stockholders' equity		$2,000,000

Required:

1. Compute the following ratios for Cedar Industries:

a. Return on sales		%
b. Asset turnover (round to 2 decimal places)		times
c. Return on assets		%
d. Return on common stockholders' equity		%

Answer 1

a)	Return On Sales = Net Income / Sales
	= $75600/663000
	=11.4 %
b)	Assets Turnover Ratio = Sales / average Assets
	= $663000/2000000
	=0.33 times
c)	Return On Assets = Net Income / Average Assets
	= $75600/2000000
	=3.78 %
d)
	Return On Common Stockholders Equity = Net Income - preferred dividend /Common stock holdersStockholders Equity
	= $50600/950000
	=5.33 %
Note: Since two years' figures are not given, average figures have not been used.