Question

The income statement for Western Grain Company, a producer of agricultural products for industrial as well as consumer markets, is shown here. Western Grain’s total assets are $4,237.1 million, and its equity is $1,713.4 million.

Consolidated Earnings and Retained Earnings Year Ended December 31

(Millions)	2017
Net sales	$6,295.4
Cost of goods sold	2,989.0
Selling and administrative expense	2,237.5
Operating profit	1,068.9
Interest expense	33.3
Other income (expense), net	(1.5)
Earnings before income taxes	1,034.1
Income taxes	353.4
Net earnings	680.7
(Net earnings per share)	$2.94
Retained earnings, beginning of year	3,033.9
Dividends paid	(305.2)
Retained earnings, end of year	$3,409.4

Calculate the following profitability ratios: profit margin, return on assets and return on equity. Assume that the industry averages for these ratios are as follows: profit margin, 12 percent; return on assets, 18 percent; and return on equity, 25 percent. Evaluate Western Grain’s profitability relative to the industry averages. Why is this information useful?

Answer 1

	(in millions)	Industry Average
Profit Margin Ratio
Net Earnings	680.7
Net Sales	6295.4
Net Earnings / Sales*100	11%	12%
The net profit margin ratio is less than industry average
Return on Assets
Net Earnings	680.7
Total Assets	4237.1
Net Earnings/ Total Assets*100	16%	18%
Return on Equity
Net Earnings	680.7
Shareholders equity
Equity (A)	1713.4
Retained Earnings
Opening Balance	3033.9
Profit earned	680.7
Dividend paid	-305.2
Closing Retained Earnings (B)	3409.4
Return on Equity
Net Earnings	680.7
Shareholders Equity (A+B)	5122.8
	13%	25%
The return on equity ratio is less than industry average