Chapter 12, Problem 81E

To determine

(a)

Introduction:

Profitability ratios are those ratios that helps a company to access the ability of business to generate earnings, revenue, elements of operation that contributes to the profit, shareholders equity etc.

To calculate: The profitability ratios of Steele’s for the year 2018 and 2019.

Answer to Problem 81E

Gross profit percentage for 2019= 27.03%

Gross profit percentage for 2018 = 28.66%

Operating margin percentage for 2019 = 10.10%

Operating margin percentage for 2018 = 11.35%

Net profit margin percentage for 2019 = 5.39%

Net profit margin percentage for 2018 = 6.28%

Return on Asset for 2019 = 1.06%

Return on Asset for 2018 = 1.16%

Return on equity on 2019 = 16.61%

Return on equity on 2018 = 20.93%.

Explanation of Solution

$Gross\text{ profit percentage= }\frac{\text{Gross Profit}}{Net\text{ sales}}\times 100$

Gross profit percentage for 2019 $\text{= }\frac{\text{\$1,958,835 }}{\$7,245,088}\times 100$

= 27.03%Gross profit percentage for 2018 $\text{= }\frac{\text{\$1,990,740 }}{\$6,944,296}\times 100$

= 28.66%

$\text{Operating margin percentage= }\frac{Incomefrom\text{ operations}}{Net\text{ sales}}\times 100$

Operating margin percentage for 2019 $=\frac{\$701,556}{\$7,245,088}$

= 10.10%

Operating margin percentage for 2018 $\text{= }\frac{\text{\$788,698 }}{\$6,944,296}\times 100$

= 11.35%

$\text{Net profit margin percentage= }\frac{Netincome}{Net\text{ sales}}\times 100$

Net profit margin percentage for 2019 $=\frac{\$391,179}{\$7,245,088}$

= 5.39%

Net profit margin percentage for 2018 $\text{= }\frac{\text{\$455,497 }}{\$6,944,296}\times 100$

= 6.28%

$\text{Return on Assets= }\frac{Netincome+\left[Interest\text{ Expense}\times \left(1-Tax\text{ Rate}\right)\right]}{Averagetotalassets}\times 100$

Return on Asset for 2019 $=\frac{\$391,179+\$3,861,858.4}{\$3,990,777.5}$

= 1.06%

$Average\text{ Total asset}$ = $\frac{\left(Opening+Closing\right)}{2}$

$=\frac{\$3,846,450+\$4,135,105}{2}$

= $3,990,777.5

$Interestnetoftax=\left[Interest\text{ expense}\times \left(1-Taxrate\right)\right]$

= $\left[\$63,685\times \left(1-39.36\%\right)\right]$

= $3,861,858.4

Let the tax rate be x

Tax rate= $\frac{\$645,179\times x}{100}=\$254,000$

= 39.36%

Return on Asset for 2018 $=\frac{\$455,497+\$3,812,517.8}{\$3,665,841.5}$

= 1.16%

$Average\text{ Total asset}=\frac{\$3,485,233+\$3,846,450}{2}$

= $3,665,841.5

Tax rate= $\frac{\$745,479\times x}{100}=\$290,000$

= 38.90%

$Interestnetoftax=\left[Interest\text{ expense}\times \left(1-Taxrate\right)\right]$

= $\left[\$62,398\times \left(1-38.90\right)\right]$

= $3,812,517.8

$\text{Return on equity= }\frac{Netincome}{Average\text{ equity}}\times 100$

Return on equity on 2019 $=\frac{\$391,179}{\$2,354,455}$

= 16.61%

$Averageequity=\frac{\left(Opening+Closing\right)}{2}$

$=\frac{\$2,267,617+\$2,441,293}{2}$

= $2,354,455

Return on equity on 2018 $=\frac{\$455,497}{\$2,175,369.5}$

= 20.93%

$Averageequity=\frac{\$2,083,122+\$2,267,617}{2}$

= $2,175,369.5.

To determine

(b)

Introduction:

Profitability ratios are those ratios that helps a company to access the ability of business to generate earnings, revenue, elements of operation that contributes to the profit, shareholders equity etc.

To explain:

What these ratios suggest about the profitability of the company and what other information will be required to know about the profitability of the company.

Answer to Problem 81E

The ratios show that the company is striving hard to improve its profitability ratios.

Explanation of Solution

The gross profit percentage of Steele’s for 2018 is 27.03% and for 2019 is 28.66% which means it has shown improvement. The operating ratio, net profit ratio and return on equity of Steele’s has also shown improvement from previous year.

The other information that will be required to know about the profitability ratios is that it is important to recognize the variation sin the profit from industry to industry as these percentages get affected by many other factors. So, it become important to find such causes.