Chapter 13, Problem 13.10E

Instruction a:

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.

Evaluation of profitability: In general, financial ratios are used to evaluate capabilities, profitability, and overall performance of a company. The following are the ratios that evaluate the profitability of a company:

• Profit margin ratio: Profit margin ratio is used to determine the percentage of net income that is being generated per dollar of revenue or sales.

Formula: $\text{Profit Margin}=\frac{\text{Net}\text{income}}{\text{Net}\text{revenue}}$

• Rate of return on total assets: Return on assets determines the particular company’s overall earning power.

Formula: $\text{Rate of return on assets}=\frac{\text{Net}\text{income}}{\text{Average total assets}}$

• Asset turnover ratio: Asset turnover ratio is used to determine the asset’s efficiency towards sales.

Formula: $\text{Asset turnover }=\frac{\text{Net}\text{revenue}}{\text{Average total assets}}$

• Rate of return on common stockholders’ equity: Rate of return on stockholders’ equity is used to determine the relationship between the net income and the average common equity that are invested in the company.

Formula: $\text{Rate of return }=\frac{\text{Net income }-\text{Preferred dividends}}{\text{Average common stockholder’s equity}}$

• Gross profit ratio: Gross profit ratio shows the relationship between the gross profit and net sales revenue of the company. This ratio is used to cover the operating expenses in order to earn profit.

Formula: $\text{Gross Profit Ratio}=\frac{\text{Gross Profit}}{\text{Net Sales}}\times 100$

To determine

To compute:  Profit margin ratio for 2017.

Instruction b:

To determine

To compute: Asset turnover ratio for 2017

Instruction c:

To determine

To compute: Return on assets ratio for 2017.

Instruction d:

To determine

To compute: Return on assets ratio for 2017.

Instruction e:

To determine

To compute: Gross profit rate