Answer
EXERCISE 15–5 Financial Ratios for Assessing Profitability
Solution:
Weller Corporation
(dollars in thousands)
For this year
1. Gross margin percentage = 34.2%
2. Net profit margin percentage = 4.5%
3. Return on total assets = 8.1%
4. Return on equity = 10.6%
Work Step by Step
$ 1.\ Gross\ margin\ percentage = \frac{Gross\ margin}{Sales } = \frac{$27,000}{$79,000} = 34.2\%\ (rounded) $
$ 2.\ Net\ profit\ margin\ percentage = \frac{Net\ income}{ Sales } = \frac{$3,540}{$79,000} = 4.5\%\ (rounded) $
$ 3.\ Return\ on\ total\ assets = \frac{Net\ income+ [Interest\ expense \times
( 1-Tax\ rate)]} {Average\ total\ assets} = \frac{$3,540+ [$600 \times
( 1-0.40)]} {\frac{$50,280+$45,960}{2}} = \frac{$3,540+ [$360]}{$48,120}
= 8.1\%\ (rounded) $
$ 4.\ Return\ on\ equity = \frac{Net\ income}{Average\ total\ stockholders’\ equity
} = \frac{$3,540}{\frac{$34,880+$31,660}{2}} = \frac{$3,540}{$33,270} = 10.6\%\ (rounded) $
