Chapter 15, Problem 15.9SE

Requirement 1:

To determine

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

To compute: Profitability ratios

Requirement 2:

To determine

To compute: Compute the rate of return on total assets for Company A for 2018.

Requirement 3:

To determine

To compute: Compute asset turnover for the Company A for the year 2018.

Requirement 4:

To determine

To compute: Compute the rate of return on common stockholders’ equity for the Company S for the year 2018.

Requirement 5:

To determine

To Comments: Rate of return on total assets.