Question

Your boss has asked you to calculate the profitability ratios of Cold Goose Metal Works, Inc. and make comments on its second-year performance as compared to its first-year performance. The following shows Cold Goose's income statement for the last two years. The company had assets of $7,050,000 in the first year and $11,277,600 in the second year. Common equity was equal to $3,750,000 in the first year, 100% of earnings were paid out as dividends in the first year, and the firm did not issue new stock in the second year.

Net Sales $3,810,000 $3,000,000
Operating costs less depreciation and amortization 1365000 1,267,500
Depreciation and amortization $190,500 $120,000
Total Operating Costs 1,555,500 1,387,500
Operating Income (or EBIT) $225,450 $1,612,500
Less: Interest 225,450 169,313
Earnings before taxes (EBT) $2,029,050 $1,443,187
Less: Taxes (40%) 821,620 577,275
Net Income $1,217,430 $865,912

Required:
Calculate the profitability ratios of Cold Goose Metal Works, Inc.

Answer 1

Gross Margin % 59.2% 53.8%

compares gross profit to sales revenue

Ne income Margin 32.0% 28.9%

compares net income to sales revenue

ROA return on assets 10.8% 12.3%

net earnings relative to the company’s total assets.

ROE return on equity 32.5% 23.1%

net income relative to stockholders’ equity,

Step-by-step explanation:

Net Sales 3,810,000 3,000,000

Operating costs less depreciation/amortization 1,365,000 1,267,500

Depreciation and amortization 190,500 120,000

Total Operating Costs 1,555,500 1,387,500

Operating Income (or EBIT) 2,254,500 1,612,500

Less: Interest 225,450 169,313

Earnings before taxes (EBT) 2,029,050 1,443,187

Less: Taxes (40%) 821,620 577,275

Net Income 1,217,430 865,912

assets 11,277,600 7,050,000

Equity 3,750,000 3,750,000

Gross Margin % 59.2% 53.8%

compares gross profit to sales revenue

Ne income Margin 32.0% 28.9%

compares net income to sales revenue

ROA return on assets 10.8% 12.3%

net earnings relative to the company’s total assets.

ROE return on equity 32.5% 23.1%

net income relative to stockholders’ equity,