Question

Profitability Ratios

East Point Retail, Inc., sells professional women's apparel through company-owned retail stores. Recent financial information for East Point is provided below (all numbers in thousands).

	Fiscal Year 3		Fiscal Year 2
Net income	$156,200		$80,500
Interest expense	3,200		12,000

	Fiscal Year 3		Fiscal Year 2		Fiscal Year 1
Total assets (at end of fiscal year)	$2,334,072		$2,220,214		$1,984,332
Total stockholders' equity (at end of fiscal year)	1,151,547		1,128,745		834,669

Assume the apparel industry average return on total assets is 8.0%, and the average return on stockholders’ equity is 15.0% for the year ended April 2, Year 3.

a. Determine the return on total assets for East Point for fiscal Years 2 and 3. Round to one decimal place.

Fiscal Year 3	%
Fiscal Year 2	%

b. Determine the return on stockholders' equity for East Point for fiscal Years 2 and 3. Round to one decimal place.

Fiscal Year 3	%
Fiscal Year 2	%

c. The return on stockholders' equity is greater than  the return on total assets due to the positive  use of leverage.

d. During fiscal Year 3, East Point’s results were weak  compared to the industry average. The return on total assets for East Point was less  than the industry average. The return on stockholders’ equity was less  than the industry average. These relationships suggest that East Point has less  leverage than the industry, on average.

Answer 1

(a)-Return on total assets

Return on total assets for Fiscal Year-3

Return on total assets for Fiscal Year-3 = (Net Income + Interest Expenses] / Average total assets

= ($156,200 + 3,200) / [($2,334,072 + 2,220,214)/2]

= $159,400 / $2,227,143

= 0.070 or

= 7.0%

Return on total assets for Fiscal Year-2

Return on total assets for Fiscal Year-2 = (Net Income + Interest Expenses] / Average total assets

= ($80,500 + $12,000) / [($2,220,214 + 1,984,3332)/2]

= $92,500 / $2,102,773

= 0.044 or

= 4.4%

(b)-Return on Stockholders Equity

Return on Stockholders Equity for Fiscal Year-3

Return on Stockholders Equity for Fiscal Year-3 = Net Income / Average stockholders equity

= $156,200 / [($1,151,547 + 1,128,745)/2]

= $156,200 / $1,140,146

= 0.137 or

= 13.7%

Return on Stockholders Equity for Fiscal Year-2

Return on Stockholders Equity for Fiscal Year-2 = Net Income / Average stockholders equity

= $80,500 / [($1,128,745 + $834,669)/2]

= $80,500 / $981,707

= 0.082 or

= 8.2%

(c)-The return on stockholders' equity is greater than the return on total assets due to the POSITIVE use of leverage.

(d)-During fiscal Year 3, East Point’s results were STRONG compared to the industry average. The return on total assets for East Point was LESS THAN the industry average. The return on stockholders’ equity was LESS THAN the industry average. These relationships suggest that East Point has LESS leverage than the industry, on average.