Homework Answers
Answer:
(a)
| S.No. | Ratio | Formula | 2019 | 2018 |
| 1 | Net profit margin | Net profit/Net sales *100 |
5,600/233,000*100 = 2.40% |
7,395/204,000*100 = 3.63% |
| 2 | Total asset turnover | Net sales/Average total assets |
233,000/187,500 = 1.24 times |
204,000/167,000 = 1.22 times |
| 3 | Return on assets | Net income/Average total assets |
5,600/187,500*100 = 2.99 % |
7,395/167,000*100 = 4.43 % |
| 4 | Return on investment | Earning before tax and extraordinary items/ Capital employed |
10,400/151,600*100 = 6.86% |
10,625/138,200*100 7.69% |
| 5 | Return on total equity | Net income/Total equity *100 |
5,600/127,000*100 4.41% |
7,395/120,800*100 6.12% |
| 6 | Return on common equity | Net income/Common equity*100 |
5,600/123,000*100 = 4.55% |
7,395/116,800*100 =6.33% |
| 7 | Gross profit margin | Gross profit/Net sales*100 |
109,000/233,000*100 = 46.78% |
94,000/204,000*100 = 46.08% |
Please see working note for explanation of each value
Working note:
(1)
| 2019 | 2918 | |
| Average total assets |
(202,000+173,000)/2 =187,500 |
(173,000+161,000)/2 = 167,000 |
| Capital employed * |
24,600+123,000+4,000 = $151,600 |
17,400+116,800+4,000 = $138,200 |
| Total equity = Common equity+ preferred stock |
123,000+4,000 = $127,000 |
116,800+4,000 =$120,800 |
| Gross profit = Sales - Cost of goods sold |
233,000-124,000 = $109,000 |
204,000-110,000 = $94,000 |
(2)
Capital employed includes all the liabilities and share capital excluding current liabilities.
Such as share capital, retained earning, free reserve, debentures, long term debt or borrowing etc.
Answer:
(b)
Profitability trend is the evaluation of profit in the business. Upward trend means Profit has increased over the time and downward trend means Profit has decreased over the time.
Specific causes that affect profitability trend are:
- Competition: If there is highly competitive market then profit will be lower and vice-versa.
- Demand of the product
- Relative cost of the Product
- Availability of substitutes product in the market
- State of economy, etc.
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