Question

Profitability Ratios

East Point Retail, Inc., sells professional women's apparel through company-owned retail stores. Recent financial information for East Point is provided below (all numbers in thousands).

	Fiscal Year 3		Fiscal Year 2
Net income	$145,300		$74,800
Interest expense	3,000		11,200
	Fiscal Year 3		Fiscal Year 2		Fiscal Year 1
Total assets	$1,583,412		$1,506,172		$1,360,494
Total stockholders' equity	1,254,299		1,229,461		907,681

Assume the apparel industry average rate earned on total assets is 5.0%, and the average rate earned on stockholders' equity is 8.0% for the year ended February 2, Year 3.

a. Determine the rate earned on total assets for East Point for fiscal Years 2 and 3. Round to one decimal place.

Fiscal Year 3	%
Fiscal Year 2	%

b. Determine the rate earned on stockholders' equity for East Point for fiscal Years 2 and 3. Round to one decimal place.

Fiscal Year 3	%
Fiscal Year 2	%

c. The rate earned on stockholders' equity is the rate earned on total assets due to the use of leverage.

d. During fiscal Year 3, East Point's results were compared to the industry average. These relationships suggest that East Point has leverage than the industry, on average.

Answer 1

Fiscal Year 3		Fiscal Year 2
Net income	$145,300		$74,800
Interest expense	3,000		11,200
	Fiscal Year 3		Fiscal Year 2		Fiscal Year 1
Total assets	$1,583,412		$1,506,172		$1,360,494
Total stockholders' equity	1,254,299		1,229,461		907,681
a.Return earned on total assets = Earnings before interest and tax/Average Assets
Year 3	9.60%
Year 2	6.00%
b.Return on Equity = Net Income/Average Equity
Year 3	11.70%
Year 2	7.00%
c.Rate on equity is higher
d.Results were better/higher
Better use of leverage

A B C D E F G 1 Fiscal Year 3 Fiscal Year 2 2 Net income 145300 74800 3 Interest expense 11200 3000 Fiscal Year 3 Fiscal Year 2 Fiscal Year 1 Total assets 1583412 1506172 1360494 Total stockholders' equity 1254299 1229461 907681 =(B2+B3)/AVERAGE(B5,D5) =(D2+D3)/AVERAGE(D5,F5) 9 a.Return earned on total assets = Earnings before interest and tax/Average Assets 10 11 Year 3 12 Year 2 13 14 b.Return on Equity = Net Income/Average Equity 15 Year 3 16 Year 2 17 18 c. Rate on equity is higher 19 =B2/AVERAGE(B6,D6) =D2/AVERAGE(D6,F6)