Answer a.
Year 2:
Operating Margin = Operating Income / Net Sales
Operating Margin = $4,177 / $6,350
Operating Margin = 65.78%
Return on Total Assets = Net Income / Total Assets
Return on Total Assets = $2,168 / $18,796
Return on Total Assets = 11.53%
Return on Common Equity = Net Income / Total Common Equity
Return on Common Equity = $2,168 / $6,250
Return on Common Equity = 34.69%
Year 1:
Profit Margin = Net Income / Net Sales
Profit Margin = $1,699 / $5,000
Profit Margin = 33.98%
Basic Earning Power = Operating Income / Total Assets
Basic Earning Power = $3,077 / $11,750
Basic Earning Power = 26.19%
Answer b.
If a company has a profit margin of 10%, it means that the
company earned a net income of $0.10 for each dollar of
sales.
If a company’s operating margin increases but its profit margin
decreases, it could mean that the company paid more in interest or
taxes.
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