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?
The income statement for Western Grain Company, a producer of agricultural products for industrial as well as consumer markets, is shown below. Western Grain’s total assets are $4,237.1 million, and its equity is $1,713.4 million.
Consolidated Earnings and
(Millions) 2010
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?
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