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%

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