Question

Following are data for BioBeans and GreenKale, which sell organic produce and are of similar size. Average total assets Net sales Net income BioBeans GreenKale $195,000 $154,500 65,000 77,250 13,650 7,000 Required: 1a. Compute the profit margin for both companies. 1b. Compute the return on total assets for both companies. 2. Based on analysis of these two measures, which company is the preferred investment? Complete this question by entering your answers in the tabs below. Reg 1A Reg 1B Required 2 Compute the profit margin for both companies. Profit margin 1 Choose Denominator: Choose Numerator: Profit margin ratio Profit margin ratio BioBeans GreenKale % % Reg 1B >

Answer 1

1A.

	Numerator	/	Denominator	Profit Margin Ratio
	Net Income	/	Net Sales	Profit Margin Ratio
BioBeans	13,650	/	65,000	21%
GreenKale	7,000	/	77,250	9.06%

1B.

	Numerator	/	Denominator	Return on Total Assets
	Net Income	/	Average Total Assets	Return on Total Assets
BioBeans	13,650	/	195,000	7%
GreenKale	7,000	/	154,500	4.53%

2.

The profit margin ratio indicates what percentage of the company's sales are left after all business expenses are paid. The return on total assets ratio indicates how effectively a company uses its assets to generate earnings. Here in this question, both ratios are higher for BioBeans in comparison with GreenKale. Therfore BioBeans company is preferred for investment which has a high profit margin ratio and high return on assets ratio.