Concept explainers
1)
Profitability ratios: In general, financial ratios are used to evaluate capabilities, profitability, and overall performance of a company. The following are the ratios that evaluate the profitability of a company:
- Profit margin ratio: Profit margin ratio is used to determine the percentage of net income that is being generated per dollar of revenue or sales.
Formula:
Rate of return on total assets: Return on assets determines the particular company’s overall earning power.
Formula:
- Asset turnover ratio: Asset turnover ratio is used to determine the asset’s efficiency towards sales.
Formula:
- Rate of return on common
stockholders’ equity : Rate of return on stockholders’ equity is used to determine the relationship between the net income and the average common equity that are invested in the company.
Formula:
To compute: Profitability ratios
Given info: Income statement and Balance sheet
2)
To Compute: the rate of return on total assets for Company S for 2016.
3)
To Compute: the asset turnover for the Company S for the year 2016.
4)
To Compute: the rate of return on common stockholders’ equity for the Company S for the year 2016.
5)
To comment: Whether the company is strong or weak.
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Horngren's Financial & Managerial Accounting, The Financial Chapters (Book & Access Card)
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