Question

The following are extracted from the financial statements of Frem, Inc., for 2012, 2011, and 2010.

	2012	2011	2010
Net sales	$233,000	$204,000
Cost of sales	(124,000)	(110,000)
Selling and administrative expenses	(95,000)	(81,500)
Other income:
Interest	(3,700)	(3,050)
Other	100	1,175
Earnings before tax and extraordinary credit	$ 10,400	$ 10,625
Provision for income tax	(4,800)	(4,740)
Earnings before extraordinary credit	5,600	5,885
Extraordinary credit	-	1,510
	$  5,600	$  7,395
Total assets	$202,000	$173,000	$161,000
Long-term debt	24,600	17,400	15,200
Common equity	123,000	116,800	112,800
Preferred stock	4,000	4,000	4,000
Preferred dividends	280	280	280

Required:

a.	Compute the following ratios for 2012 and 2011.
	1.	Net profit margin
	2.	Total asset turnover
	3.	Return on assets
	4.	Return on investment
	5.	Return on total equity
	6.	Return on common equity
	7.	Gross profit margin
b.	Discuss the trend in profitability and identify specific causes for the trend.

Answer 1

Table showing required ratios

1	Particulars	2011	2012
	PAT	7395	5600
	Net sales	204000	233000
	Net profit margin	3.63%	2.40%
2	Particulars	2011	2012
	Net sales	204000	233000
	Asset	173000	202000
	Total asset turnover	1.179191	1.153465
3&4	Particulars	2011	2012
	PAT	7395	5600
	Asset	173000	202000
	Return on assets/investment	4.3%	2.8%
5&6	Particulars	2011	2012
	PAT	7395	5600
	Common equity	116800	123000
	Return on total equity	6.33%	4.55%
7	Particulars	2011	2012
	Net sales	204000	233000
	COGS	-110000	-124000
	Gross profit	94000	109000
	Gross margin	46.08%	46.78%

b)

Statement showing P&L

Particulars	2011	2012	% increase
Net sales	204000	233000	14.2%
COGS	-110000	-124000	12.7%
Selling and admin expense	-81500	-95000	16.6%
Other income
Interest	-3050	-3700	21.3%
Others	1175	100	-91.5%
EBIT	10625	10400	-2.1%
Provision for income tax	-4740	-4800	1.3%
Earnings before extra ordinary item	5885	5600	-4.8%
Credit	1510		-100.0%
PAT	7395	5600	-24.3%

Items as % of sales

Net sales	204000	233000
COGS	-110000	-124000
% of sales	53.9%	53.2%
Selling and admin expense	-81500	-95000
% of sales	39.95%	40.77%

It is clear that there was abnormal profit during year 2011 as a result there was abnormal profit. Considering expenses as % of sales , they are proportionate to change in sales. Thus one can say that company might have increased in size but not in profitability. Margins are the same