Review of profitability ratios



Q42. Review of profitability ratios
Calculate the following profitability ratios based on the information below:
(1) Profit margin ratio
(2) Gross profit ratio
(3) Return on assets (ROA)
(4) Return on equity (ROE)

Sales = $1,500,000
Cost of goods sold = $975,000
Gross profit = $525,000
Net income = $180,000
Average total assets = $3,000,000
Average stockholders’ equity = $2,400,000

A42.
(1) Profit margin ratio
= Net income / Sales
= $180,000 / $1,500,000 = 12%

(2) Gross profit ratio
= Gross profit / Sales
= (Sales – Cost of goods sold) / Sales
= ($1,500,000 – $975,000) / $1,500,000
= $525,000 / $1,500,000 = 35%

(3) Return on assets (ROA)
= Net income / Average total assets
= $180,000 / $3,000,000 = 6%

(4) Return on equity (ROE)
= Net income / Average stockholders’ equity
= $180,000 / $2,400,000 = 7.5%