Profitability Ratios The following shows Food Corp\'s income statement for the l
ID: 2749836 • Letter: P
Question
Profitability Ratios
The following shows Food Corp's income statement for the last 2 years. The company had assets of $10,575 million in the 1st year & $16,916 million in the 2nd. Common Equity was equal to $5,625 million in the 1st year, 100% of earnings were paid out as dividends in the 1st year & the firm did not issue new stock in the 2nd year.
Food Corp Income Statement for the year ending on Dec. 31 (Millions of dollars)
Year 2
Year 1
Net sales
5,715
4,500
Operating costs except depreciation & amortization
1,855
1,723
Depreciation & amortization
286
180
Total operating costs
2,141
1,903
Operating income (EBIT)
3,574
2,597
Less: interest
357
338
Earnings before taxes (EBT)
3,217
2,259
Less: taxes (40%)
1,287
904
Net income
1,930
1,355
1. Calculate the profitability ratios of Food Corp in the following table. Convert all calculations to a percentage rounded to two decimal places:
Year 2
Year 1
Operating margin
???
57.71%
Net profit margin
33.77%
???
Return on total assets
???
12.81%
Return on equity
???
24.09%
Basic earning power
21.13%
???
Year 2
Year 1
Net sales
5,715
4,500
Operating costs except depreciation & amortization
1,855
1,723
Depreciation & amortization
286
180
Total operating costs
2,141
1,903
Operating income (EBIT)
3,574
2,597
Less: interest
357
338
Earnings before taxes (EBT)
3,217
2,259
Less: taxes (40%)
1,287
904
Net income
1,930
1,355
Explanation / Answer
1)Year 1,Operating margin = EBIT /Sales
= 3574/5715
= .6254 or 62.54%
2)Net profit margin =Net income /sales
= 1355 / 4500
=.3011 or 30.11%
3)Returnon total asset = net income /Total asset
= 1930 /16916
= 1930 / 16916
= .1141 or 11.41%
= .1404 or 14.04%
Return on equity = net income /average equity
= 1930 / (5625+5625)/2
= 1930 /5625
= .3431 or 34.31%
Basic earning power = EBIT /Total asset
= 2597 / 10575
=.2456 or 24.56%
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