Question

Perform ratio analysis, and discuss change in financial position and operating results

Condensed balance sheet and income statement data for Jergan Corporation are presented here.
JERGAN CORPORATION
Balance Sheet
December 31
2017 2016 2015
Cash $30,000 $20,000 $18,000
Accounts receivable (net) 50,000 45,000 48,000
Other current assets 90,000 95,000 64,000
Investments 55,000 70,000 45,000
Plant and equipment (net) 500,000 370,000 358,000
$725,000 $600,000 $533,000
Current liabilities $85,000 $80,000 $70,000
Long-term debt 145,000 85,000 50,000
Common stock, $10 par 320,000 310,000 300,000
Retained Earnings 175,000 125,000 113,000
$725,000 $600,000 $533,000
JERGAN CORPORATION
Income Statement
For the Year Ended December 31
2017 2016
Sales revenue $740,000 $600,000
Less: Sales return and allowances 40,000 30,000
Net sales 700,000 570,000
Cost of goods sold 425,000 350,000
Gross profit 275,000 220,000
Operating expenses 180,000 150,000
Net income 95,000 70,000
Additional information:
1. The market price of Jergan's common stock was $7.00, $7.50, and $8.50 for 2012,
2016, and 2017, respectively.
2. You must compute dividends paid. All dividends were paid in cash.
Instructions
(a) Compute the following ratios for 2016 and 2017.
(1) Profit margin. 5. Price-earnings ratio.
(2) Gross profit rate. 6. Payout ratio.
(3) Asset turnover. 7. Debt to assets ratio.
(4) Earnings per share.

Answer 1

Please see below

Step-by-step explanation:

1. Profit margin = Net profit / Net sales

2016 - Profit margin

= (70,000 / 570,000) * 100

= 12.28%

2017 - Profit margin

= (95,000 / 700,000) * 100

= 13.57

2. Gross profit rate = Gross profit / Net sales

2016 - Gross profit rate

= (220,000 / 570,000) * 100

= 38.60%

2017 - Gross profit rate

= (275,000 / 700,000) * 100

= 39.29%

3. Asset turnover = Net sales / Average total assets

2016 - Asset turnover

= (570,000 / [(600,000 + 533,000) / 2 ]

= 570,000 / 566,500

= 1.01 times

2017 - Asset turnover

= (700,000 / [(725,000 + 600,000) / 2 ]

= 700,000 / 662,500

= 1.06 times

4. Earnings per share = Net income / Outstanding shares

2016 - Earnings per share

= 70,000 / (310,000/10)

= 70,000 / 31,000

= $2.26 per share

2017 - Earnings per share

= 95,000/ (320,000/10)

= 95,000 / 32,000

= $2.97 per share.

5. Price earnings ratio = Market value per share / EPS

2016 - price earnings ratio

= 7.50 /2.26

= 3.32 times

2017 - price earnings ratio

= 8.50/2.97

= 2.86 times

6. Payout ratio = Dividend per share / Net income or earnings per share × 100

2016 - payout ratio

=

7. Debts to assets ratio = Total liabilities / Total assets

2016 - Debts to assets ratio

=