Chapter 17, Problem 3BTN

(1)

To determine

Compute the profit margin ratio of Company H for its years ending December 31, 2015 and December 31, 2016 and interpret the results.

Explanation of Solution

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

$\text{Net profit margin}\text{=}\frac{\text{Net}\text{Income}}{\text{Net Sales Revenue}}$

Compute the profit margin of Company H for its years ending December 31, 2015 and December 31, 2016:

Ratios	December 31, 2016	Result	December 31, 2015	Result
Profit margin ratio	$\frac{\$720,044}{\$7,421,768 }$	9.7%	$\frac{\$512,951}{\$7,386,626}$	6.9%

Table (1)

Interpretation of the results: As compared to the December 31, 2016 ratios, December 31, 2015 ratios are decreased except the gross profit ratio. It indicates that the profitability of the Company H is worse than before.

(2)

To determine

Compute the gross profit ratio of Company H for its years ending December 31, 2016 and December 31, 2015 and interpret the results.

Explanation of Solution

Gross Profit Percentage: Gross profit is the financial ratio that shows the relationship between the gross profit and net sales. It represents gross profit as a percentage of net sales. It can be calculated by dividing gross profit and net sales.

$\text{Gross profit ratio}\text{=}\frac{\text{Gross profit}}{\text{Net Sales Revenue}}$

Compute the gross profit ratio of Company H for its years ending December 31, 2016 and December 31, 2015

Ratios	December 31, 2016	Result	December 31, 2015	Result
Gross profit ratio	$\frac{\$3,157,891}{\$7,440,181}$	42.44%	$\frac{\$3,382,675}{\$7,386,626}$	45.8%

Table (2)

Analysis:

The gross margin ratio of Company H for December 31, 2016 and December 31, 2015 are 42.44% and 45.8% respectively. This indicates that the gross margin ratio has decreased (improved) in 2016.

(3)

To determine

Compute the return on total assets ratio of Company H for its years ending December 31, 2016 and December 31, 2015 and interpret the results.

Explanation of Solution

Return on total assets: Return on total assets is the financial ratio which determines the amount of net income earned by the business with the use of total assets owned by it. It indicates the magnitude of the company’s earnings with relative to its total assets.

$\text{Return on TotalAssets }\left(\text{ROA}\right)=\frac{\text{Net}\text{Income}}{\text{Average}\text{Total}\text{Assets}}$

Compute the return on total assets ratios of Company H for its years ending December 31, 2016 and December 31, 2015:

Ratios	December 31, 2016	Result	December 31, 2015	Result
Return on total assets	$\frac{\$720,044}{[\$5,524,333+\$5,344,371]÷2}$	13.2%	$\frac{\$512,951}{[\$5,344,371+\$5,622,870]÷2}$	9.4%

Table (3)

Analysis:

The return on total assets ratio of Company H for December 31, 2016 and December 31, 2015 are 13.2% and 9.4% respectively. This indicates that the return on total assets has increased (improved) in 2016.

(4)

To determine

Compute the Return on common stockholders’ equity ratio of Company H for its years ending December 31, 2016 and December 31, 2015 and interpret the results.

Explanation of Solution

Return on common stockholders’ equity ratio: This ratio is used to determine the relationship between the net income available for the common stockholders’ and the average common equity that is invested in the company.

$\text{Return on common stockholders' Equity}\text{=}\frac{\text{Net}\text{Income}}{\text{Average}\text{Total}\text{Stockholder'}\text{Equity}}$

Compute the return on common stockholders’ equity ratio of Company H for its years ending December 31, 2016 and December 31, 2015:

Ratios	December 31, 2016	Result	December 31, 2015	Result
Return on common stockholders’ equity	$\frac{\$720,044}{[\$1,047,462+\$827,687]÷2}$	76.8%	$\frac{\$512,951}{[\$1,047,462+\$1,519,530]÷2}$	40.0%

Table (4)

Analysis:

The return on common stockholders’ equity of Company H for December 31, 2016 and December 31, 2015 are 76.8% and 40.0% respectively. This indicates that the return on common stockholders’ equity has increased (improved) in 2016.

(5)

To determine

Compute basic net income per common share of Company H for its years ending December 31, 2016 and December 31, 2015 and interpret the results.

Explanation of Solution

Earnings per share: Earnings per share help to measure the profitability of a company. Earnings per     share are the amount of profit that is allocated to each share of outstanding stock.

$\text{EPS}\text{=}\frac{\text{Net}\text{Income}}{\left(\text{Weighted Average Number of common Shares Outstanding}\right)}$

Compute basic net income per common share of Company H for its years ending December 31, 2016 and December 31, 2015:

Ratios	December 31, 2016	Result	December 31, 2015	Result
Basic net income per common share	Referred from consolidated income statement	$3.45	Referred from consolidated income statement	$2.40

Table (5)

Analysis:

The basic net income per common share of Company H for December 31, 2016 and December 31, 2015 are $3.45 and $2.40 respectively. This indicates that the net income per common share has increased (improved) in 2016.