Question

Financial​ ratios: Profitability. The financial statements for Tyler​ Toys, Inc. are shown below. Calculate the profit​ margin, return on​ assets, and return on equity for 2013 and 2014 for Tyler Toys. Should any of these ratios or the change in a ratio warrant concern for the managers of Tyler Toys or the​ shareholders?

Tyler Toys, Inc.
Income Statement for Years Ending December 31, 2013 and 2014
	2014	2013
Revenue	$14,147,036	$13,566,155
Cost of goods sold	$-8,447,557	$-8,131,158
Selling, general, and administrative expenses	$-997,273	$-980,121
Depreciation	$-1,498,746	$-1,472,768
EBIT	$3,203,460	$2,982,108
Interest expense	$-376,332	$-355,167
Taxes	$-1,074,309	$-998,238
Net income	$1,752,819	$1,628,703

                                                                                                          

Tyler Toys, Inc.
Balance Sheet as of December 31, 2013 and 2014
ASSETS	2014	2013	LIABILITIES	2014	2013
Current assets			Current liabilities
Cash	$190,940	$187,570	Accounts payable	$1,545,880	$1,455,686
Investments	$181,149	$121,240	Short-term debt	$312,342	$333,103
Accounts receivable	$668,147	$630,715	Total current liabilities	$1,858,222	$1,788,789
Inventory	$588,466	$564,327	Long-term liabilities
Total current assets	$1,628,702	$1,503,852	Debt	$7,285,512	$6,604,056
Long-term assets			Other liabilities	$1,463,963	$1,345,334
Investments	$3,053,227	$2,827,600	Total liabilities	$10,607,697	$9,738,179
Plant, property, and equipment	$8,497,215	$8,481,174	OWNERS’ EQUITY
Goodwill	$348,708	$346,172	Common stock	$1,457,797	$1,454,890
Intangible assets	$1,158,090	$957,807	Retained earnings	$2,620,448	$2,923,536
			Total owners’ equity	$4,078,245	$4,378,426
			TOTAL LIABILITIES
TOTAL ASSETS	$14,685,942	$14,116,605	AND OWNERS’ EQUITY	$14,685,942	$14,116,605

What is the profit margin for​ 2014? _________ ​(Round to two decimal​ places.)

What is the profit margin for​ 2013? ________ ​(Round to two decimal​ places.)

What is the return on assets for​ 2014? ________ ​(Round to two decimal​ places.)

What is the return on assets for​ 2013? _______ ​(Round to two decimal​ places.)

What is the return on equity for​ 2014? ________ (Round to two decimal​ places.)

What is the return on equity for​ 2013? ________ ​(Round to two decimal​ places.)

Should any of these ratios or the change in a ratio warrant concern for the managers of Tyler Toys or the​ shareholders? ​(Select the best​ response.)

A.These ratios indicate a somewhat strong firm performance for the equity holders with an ROE of over 43.01 % for 2014.

B.These ratios indicate a somewhat weak firm performance for the equity holders with an ROE of over 43.01 % for 2013.

C.These ratios indicate a somewhat weak firm performance for the equity holders with an ROE of over 43.01 % for 2014.

D.These ratios indicate a somewhat strong firm performance for the equity holders with an ROE of over 43.01 % for 2013.

Answer 1

1. Profit Margin = Net Income/ Revnue * 100

2013:

$1,628,703 / $13,566,155 * 100 = 12.00 %

2014:

$1,752,819/ $14,147,036 * 100 = 12.39 %

2. ROA = Net Income/ Total Assets

              2013:

             $1,628,703 / $14,116,605 * 100 = 11.53%

             2014:

$1,752,819/ $14,685,942 * 100 = 11.93%

3. ROE= Net Income/ Total Owners Equity

2013:

$1,628,703 / $4,378,426 * 100 = 37.19 %

2014:

$1,752,819/ $4,078,245 * 100 = 42.97 %

Therefore, the best response is A “These ratios indicate a somewhat strong firm performance for the equity holders with an ROE of over 43.01% for 2014”. All the ratios represented a strong earning performance of the company. The equity shareholders are getting adequate return on their equity.