Question

Use the following information to analyze BCD Equipment. Calculate any profit measures deemed necessary in order to discuss the profitability of the company in 2018 and 2017.

BCD Equipment Income Statement

USD	2018	2017
Net sales	125.000	140.000
COGS	90.000	95.000
Gross profit	35.000	45.000
General and administrative expenses	31.000	36.000
Operating profit	4.000	9.000
Interest expense	1.000	1.000
Earnings before taxes	3.000	8.000
Income taxes	900	2.400
Net income	2.100	5.600

Answer 1

The profitability measures of BCD company is :

Gross profit ratio in 2018 :

= Gross profit/ sales

= $35/ $125

= 28%

Gross profit ratio in 2017 is :

= $45/ $140

= 32.14%

So, the gross profit has declined in these 2 years.

The net profit ratio for 2018 is:

= net profit/ sales

= $2.1/ $125

= 1.68%

The net profit for 2017 is :

= 5.6/ 140

= 4%

So, the net profit has also fallen over the years.

Interest coverage ratio for 2018 is  :

EBIT/ Interest

= $3/ $1

= 3

For 2017 the interest coverage ratio is :

= 8/ 2.4

= 3.33

So, the interest coverage ratio has also declined. which indicates that the capability of the company to pay off interest on debt is falling.