Roak Company and Clay Company are similar firms that operate in the same industry. Clay began operations 2 years ago and Roak started 5 years ago. In the current year, both companies pay 8% interest on their debt to creditors. The following additional information is available. Total asset turnover Return on total assets Profit margin ratio Sales Current Year 3.8 10.0% 3.18 $445,000 Roak Company Clay Company 1 Year Ago 2 Years Ago Current Year 1 Year Ago 3.5 3.7 2.2 11.6% 3.0% $431,000 11.09 3.28 $415,000 2.2 6.9% 4.2% $245,000 6.68 4.4% $205,000 2 Years Ago 1.8 6.3% 4.3% $145,000 1. (a) Which company has the better profit margin? (b) Which has the better asset turnover? (c) Which has the better return on assets? 2. Which company has the better rate of growth in sales? 3. Did the company successfully use financial leverage in the current year, as judged by return on assets exceeding its interest rate on debt, in the case of (a) Roak and (b) Clay?

Roak Company and Clay Company are similar firms that operate in the same industry. Clay began operations 2 years ago and Roak started 5 years ago. In the current year, both companies pay 8% interest on their debt to creditors. The following additional information is available. Total asset turnover Return on total assets Profit margin ratio Sales Current Year 3.8 10.0% 3.18 $445,000 Roak Company Clay Company 1 Year Ago 2 Years Ago Current Year 1 Year Ago 3.5 3.7 2.2 11.6% 3.0% $431,000 11.09 3.28 $415,000 2.2 6.9% 4.2% $245,000 6.68 4.4% $205,000 2 Years Ago 1.8 6.3% 4.3% $145,000 1. (a) Which company has the better profit margin? (b) Which has the better asset turnover? (c) Which has the better return on assets? 2. Which company has the better rate of growth in sales? 3. Did the company successfully use financial leverage in the current year, as judged by return on assets exceeding its interest rate on debt, in the case of (a) Roak and (b) Clay?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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