Question

Exercise 12-81
Profitability Ratios

Financial statements for Steele Inc. follow.

Steele Inc.
Consolidated Income Statements
(in thousands except per share amounts)
		2019		2018		2017
Net sales		$7,245,088		$6,944,296		$6,149,218
Cost of goods sold		(5,286,253)		(4,953,556)		(4,355,675)
Gross margin		$1,958,835		$1,990,740		$1,793,543
General and administrative expenses		(1,259,896)		(1,202,042)		(1,080,843)
Special and nonrecurring items		2,617		0		0
Operating income		$701,556		$788,698		$712,700
Interest expense		(63,685)		(62,398)		(63,927)
Other income		7,308		10,080		11,529
Gain on sale of investments		0		9,117		0
Income before income taxes		$645,179		$745,497		$660,302
Provision for income taxes		(254,000)		(290,000)		(257,000)
Net income		$391,179		$455,497		$403,302

Steele Inc.
Consolidated Balance Sheets
(in thousands)
ASSETS		Dec. 31, 2019		Dec. 31, 2018
Current assets:
Cash and equivalents		$320,558		$41,235
Accounts receivable		1,056,911		837,377
Inventories		733,700		803,707
Other		109,456		101,811
Total current assets		$2,220,625		$1,784,130
Property and equipment, net		1,666,588		1,813,948
Other assets		247,892		248,372
Total assets		$4,135,105		$3,846,450
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$250,363		$309,092
Accrued expenses		347,892		274,220
Other current liabilities		15,700		0
Income taxes		93,489		137,466
Total current liabilities		$707,444		$720,778
Long-term debt		650,000		541,639
Deferred income taxes		275,101		274,844
Other long-term liabilities		61,267		41,572
Total liabilities		1,693,812		1,578,833
Stockholders’ equity:
Preferred stock		$100,000		$100,000
Common stock		89,727		89,727
Additional paid-in capital—common stock		128,906		127,776
Retained earnings		2,397,112		2,136,794
		$2,715,745		$2,454,297
Less: Treasury stock, at cost		(274,452)		(186,680)
Total stockholders’ equity		$2,441,293		$2,267,617
Total liabilities and stockholders’ equity		$4,135,105		$3,846,450

Use the information provided above and below to respond to the following requirements.

Statement Item	January 1, 2018 (in thousands)
Total assets	$3,485,233
Total stockholders’ equity	2,083,122

Required:

Compute the five profitability ratios for 2018 and 2019. Round intermediate calculations and final answers to two decimal places.

	2019	2018
Gross profit percentage	fill in the blank 1 %	fill in the blank 2 %
Operating margin percentage	fill in the blank 3 %	fill in the blank 4 %
Net profit margin percentage	fill in the blank 5 %	fill in the blank 6 %
Return on assets
Return on equity	fill in the blank 9 %	fill in the blank 10 %

Answer 1

Gross Profit Percentage = Gross Margin / Net Sales
2019 = $1958835 / 7245088 = 27.04%
2018 = $1990740 / 6944296 = 28.67%

Operating Margin Percentage = Operating Income / Net Sales
2019 = $701556 / 7245088 = 9.68%
2018 = $788698 / 6944296 = 11.36%

Net Profit Margin Percentage = Net Income / Net Sales
2019 = $391179 / 7245088 = 5.40%
2018 = $455497 / 6944296 = 6.56%

Return on Assets = Net Income / Average Total Assets
2019 = $391179 / 3990777.5 = 9.80%
2018 = $455497 / 3665841.5 = 12.43%

Return on Equity = Net Income / Average Total Equity
2019 = $391179 / 2354455 = 16.16%
2018 = $455497 / 2175369.5 = 20.94%