In: Accounting
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 3Fiscal Year 2
Net income$150,000 $77,300
Interest expense3,100 11,500
Fiscal Year 3Fiscal Year 2Fiscal Year 1
Total assets (at end of fiscal year)$2,120,642 $2,017,196 $1,761,528
Total stockholders' equity (at end of fiscal year)1,089,928 1,068,346 794,304
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 the return on total assets due to the use of leverage.
d. During fiscal Year 3, East Point’s results were compared to the industry average. The return on total assets for East Point was than the industry average. The return on stockholders’ equity was than the industry average. These relationships suggest that East Point has leverage than the industry, on average.
Average Total Assets: | ||||||||
Year-2 (1761528+2017196) /2 = | 1889362 | |||||||
Year-3 (2017196+2120642)/2= | 2068919 | |||||||
Average Stockholder's equity: | ||||||||
Year-2 (794304+1068346) /2 = | 931325 | |||||||
Year-3 (1068346+1089928)/2= | 1079137 | |||||||
Req a: | ||||||||
Return on assets | ||||||||
Year-2 | Year-3 | |||||||
Net Income | 77300 | 150000 | ||||||
Add: Interest expense | 11500 | 3100 | ||||||
Income before Interest | 88800 | 153100 | ||||||
Divide: Average total assets | 1889362 | 2068919 | ||||||
Return on total assets | 4.70% | 7.40% | ||||||
Req b. | ||||||||
Return on equity | ||||||||
Year-2 | Year-3 | |||||||
Net Income | 77300 | 150000 | ||||||
Divide: Average stockholder's equity | 931325 | 1079137 | ||||||
Return on equity | 8.30% | 13.90% | ||||||
c. | ||||||||
The return on stockholder's equity is higher than return on assets due to higher use of leverage | ||||||||
reqd. | ||||||||
The return on total assets of East point is lower than industry average | ||||||||
The return on equity is also lower than industry average | ||||||||
These relationship suggest that East point has lower leverage tha the industry on average | ||||||||