Question

Please solve and find profit margin using the data provided.

Selected Statistics Caneton Manufacturing 2017 2018 2019 Current ratio 2.7 2.8 Quick ratio 1.4 1.6 Inventory turnover 5.7 5.8 Total asset turnover 1.9 2.0 1.9 Return on sales 6.00% 6.50% 7.00% Return on assets 11.40% 13.00% 13.30% Return on equity 19.04% 27.66% 30.2% Total debt-to-assets 0.40 0.53 0.56 Price-earnings ratio 13.7 14.0 15.0 Average stock price $21.78 $24.92 $31.50 • Source: Dons industry ratios (data have been adjusted for this case)

Answer 1

We know that profit margin = Net income/Sales

Multiplying and dividing RHS with assets, we get

Profit margin = NI*Assets/(Sales*Assets)

we know that NI/assets = ROA, and Sales/Assets = Total asset turnover

So, Profit margin = ROA/Total assets turnover

For year 2017, Profit margin = 11.40/1.9 = 6%

For year 2018, Profit margin = 13/2 = 6.50%

For year 2019, Profit margin = 13.3/1.9 = 7%