Question

Exercise 15-5 Financial Ratios for Assessing Profitability [LO15-5]

Comparative financial statements for Weller Corporation, a merchandising company, for the year ending December 31 appear below. The company did not issue any new common stock during the year. A total of 920,000 shares of common stock were outstanding. The interest rate on the bond payable was 12%, the income tax rate was 40%, and the dividend per share of common stock was $0.75 last year and $0.40 this year. The market value of the company’s common stock at the end of this year was $24. All of the company’s sales are on account.

Weller Corporation Comparative Balance Sheet (dollars in thousands)
	This Year			Last Year
Assets
Current assets:
Cash	$	2,772		$	2,930
Accounts receivable, net		15,600			10,350
Inventory		10,300			8,680
Prepaid expenses		1,920			2,340
Total current assets		30,592			24,300
Property and equipment:
Land		7,200			7,200
Buildings and equipment, net		20,400			20,200
Total property and equipment		27,600			27,400
Total assets	$	58,192		$	51,700
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	10,700		$	8,900
Accrued liabilities		840			1,300
Notes payable, short term		420			420
Total current liabilities		11,960			10,620
Long-term liabilities:
Bonds payable		7,500			7,500
Total liabilities		19,460			18,120
Stockholders' equity:
Common stock		920			920
Additional paid-in capital		4,800			4,800
Total paid-in capital		5,720			5,720
Retained earnings		33,012			27,860
Total stockholders' equity		38,732			33,580
Total liabilities and stockholders' equity	$	58,192		$	51,700

Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands)
	This Year			Last Year
Sales	$	91,000		$	86,000
Cost of goods sold		58,000			54,000
Gross margin		33,000			32,000
Selling and administrative expenses:
Selling expenses		9,700			9,200
Administrative expenses		13,200			12,200
Total selling and administrative expenses		22,900			21,400
Net operating income		10,100			10,600
Interest expense		900			900
Net income before taxes		9,200			9,700
Income taxes		3,680			3,880
Net income		5,520			5,820
Dividends to common stockholders		368			736
Net income added to retained earnings		5,152			5,084
Beginning retained earnings		27,860			22,776
Ending retained earnings	$	33,012		$	27,860

Required:

Compute the following financial data for this year:

1. Gross margin percentage. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

2. Net profit margin percentage. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

3. Return on total assets. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

4. Return on equity. (Round your percentage answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

Answer 1

1.

Gross Margin Percentage
Gross Margin	/	Sales	=	Gross Margin Percentage
33,000.00	/	91,000.00	=	36.3%

2.

Net Profit margin percentage
Net Income	/	Sales	=	Net Profit margin percentage
5,520.00	/	91,000.00	=	6.1%

3.

RETURN ON TOTAL ASSETS
Return on total assets	=	Net income	/	Average Total Assets
	=	5,520.00	/	(51,700 + 58,192) / 2	=	10.0	%

4.

Return on equity	=	Net income	/	Total average equity
	=	5,520.00	/	(33,580+38,732)/2	=	15.27%