Question:
Company ABC has the following information for the year ended December 31, 2022:
- Net Sales: $500,000
- Cost of Goods Sold: $200,000
- Operating Expenses: $100,000
- Interest Expense: $10,000
- Income Tax Rate: 30%
Calculate the following financial ratios for Company ABC:
1. Gross Profit Margin
2. Operating Profit Margin
3. Net Profit Margin
4. Return on Assets (ROA)
5. Return on Equity (ROE)
Solution:
1. Gross Profit Margin:
Gross Profit Margin = (Net Sales - Cost of Goods Sold) / Net Sales
Gross Profit Margin = ($500,000 - $200,000) / $500,000
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Gross Profit Margin = $300,000 / $500,000
Gross Profit Margin = 0.6 or 60%
2. Operating Profit Margin:
Operating Profit Margin = (Net Sales - Cost of Goods Sold - Operating Expenses) / Net Sales
Operating Profit Margin = ($500,000 - $200,000 - $100,000) / $500,000
Operating Profit Margin = $200,000 / $500,000
Operating Profit Margin = 0.4 or 40%
3. Net Profit Margin:
Net Profit Margin = (Net Sales - Cost of Goods Sold - Operating Expenses - Interest Expense) / Net Sales
Net Profit Margin = ($500,000 - $200,000 - $100,000 - $10,000) / $500,000
Net Profit Margin = $190,000 / $500,000
Net Profit Margin = 0.38 or 38%
4. Return on Assets (ROA):
ROA = Net Income / Total Assets
ROA = ($190,000 - ($190,000 * 0.3)) / Total Assets
Assuming Total Assets = $1,000,000,
ROA = ($190,000 - $57,000) / $1,000,000
ROA = $133,000 / $1,000,000
ROA = 0.133 or 13.3%
5. Return on Equity (ROE):
ROE = Net Income / Shareholders' Equity
ROE = ($190,000 - ($190,000 * 0.3)) / Shareholders' Equity
Assuming Shareholders' Equity = $500,000,
ROE = ($190,000 - $57,000) / $500,000
ROE = $133,000 / $500,000
ROE = 0.266 or 26.6%
6. Current Ratio: Current Ratio = Current Assets / Current Liabilities
Assuming Current Assets = $300,000 and Current Liabilities = $150,000, Current Ratio = $300,000 / $150,000 Current Ratio = 2
7. Debt-to-Equity Ratio:
Debt-to-Equity Ratio = Total Debt / Shareholders' Equity
Assuming Total Debt = $100,000 and Shareholders' Equity = $400,000, Debt-to-Equity Ratio = $100,000 / $400,000
Debt-to-Equity Ratio = 0.25 or 25%
8. Earnings per Share (EPS):
EPS = Net Income / Weighted Average Number of Common Shares Outstanding
Assuming Net Income = $190,000 and Weighted Average Common Shares
Outstanding = 100,000,
EPS = $190,000 / 100,000
EPS = $1.90
9. Price-to-Earnings (P/E) Ratio:
P/E Ratio = Market Price per Share / Earnings per Share
Assuming Market Price per Share = $25 and Earnings per Share = $1.90,
P/E Ratio = $25 / $1.90
P/E Ratio = 13.16
10. Return on Investment (ROI): ROI = Net Profit / Total Investment
Assuming Net Profit = $190,000 and Total Investment = $800,000,
ROI = $190,000 / $800,000
ROI = 0.2375 or 23.75%