Chapter 15, Problem 9BTN

To determine

Profit Margin:

A profit margin is a profitability ratio which is computed by dividing the net income by the net sales of a company. It expresses the percentage of profit based on the net sales of a company.

Return on Total Assets:

Return on total assets measures the efficiency of a company in utilizing their total assets towards generating optimal profit. It is computed by dividing the net income earned during a particular by the average total assets of the company during the same period.

Total Asset Turnover:

It is an efficiency ratio which measures the ability of a company generating sales from the total assets of the company. Total asset turnover ratio is ascertained by dividing the net sales by the average total assets of a company.

1. Computation of Samsung’s return on total assets and its components of profit margin and total asset turnover of most recent two years.

2. Which of these three companies has the highest return on total assets? Highest profit margin? Highest total asset turnover? Interpret these results for the (a) current year and (b) Prior year.

Answer to Problem 9BTN

Solution:

1.

SAMSUNG	Current Year	One Prior Year
Profit Margin	13.3%	11.9%
Total Asset Turnover	1.16	1.19
Return on Total Assets	15.4%	14.2%

2.

	SAMSUNG	APPLE	GOOGLE
	Current Year	One Prior Year	Current Year	One Prior Year	Current Year	One Prior Year
Profit Margin	13.3%	11.9%	21.7%	26.7%	21.6%	21.4%
Total Asset Turnover	1.16	1.19	0.89	1.07	0.58	0.60
Return on Total Assets	15.4%	14.2%	19.3%	28.6%	12.5%	12.8%

During the current year, Apple has the highest profit margin and return on total asset with 21.7% and 19.3% respectively and Samsung has the highest total asset turnover with 1.16. Also in the one prior year, the Apple Corporation has the highest profit margin and return on total asset with 26.7% and 28.6 respectively and Samsung has the highest total asset turnover with 1.19.

Explanation of Solution

1.

  $\begin{array}{l}ReturnonTotalAssets=\frac{Netincome}{AverageTotalAssets}\hfill \\ CurrentYear=\frac{30,474,764}{197,573,294*}\hfill \\ =\text{ 15}\text{.4\%}\hfill \\ \hfill \\ AverageTotalAssets=\frac{181,071,570+214,075,018}{2}\hfill \\ = 197,573,294*\hfill \\ \hfill \\ OneYearPrior=\frac{23,845,285}{168,435,917*}\hfill \\ =\text{ 14}\text{.2\%}\hfill \\ \hfill \\ AverageTotalAssets=\frac{155,800,263+181,071,570}{2}\hfill \\ = 168,435,917*\hfill \end{array}$

  $\begin{array}{l}ProfitMargin=\frac{NetIncome}{NetSales}\hfill \\ CurrentYear=\frac{30,474,764}{228,692,667}\hfill \\ =13.3\%\hfill \\ OnePriorYear=\frac{23,845,285}{201,103,613}\hfill \\ =11.9\%\hfill \\ \hfill \\ TotalAssetTurnover=\frac{NetSale}{AverageTotalAsset}\hfill \\ \hfill \\ CurrentYear =\frac{228,692,667}{197,573,294}\hfill \\ =1.16\hfill \\ \hfill \\ OnePriorYear=\frac{201,103,613}{168,435,917}\hfill \\ =1.19\hfill \end{array}$

2. Computation of Return on Total Asset
  $\begin{array}{l}ReturnonTotalAsset=ProfitmarginXTotalAssetTurnover\hfill \\ \hfill \\ Apple\hfill \\ CurrentYear=21.7\%X0.89\%=19.3\%\hfill \\ OnePriorYear=26.7\%X1.07\%=28.6\%\hfill \\ \hfill \\ Google\hfill \\ CurrentYear=21.6\%X0.58\%=12.5\%\hfill \\ OnePriorYear=21.4\%X0.60\%=12.8\%\hfill \end{array}$

Conclusion

It is concluded from the results that the Apple Corporation has the highest profit margin and return on total asset and Samsung Company has the highest total asset turnover for most recent two years.