Question

Your boss has asked you to calculate the profitability ratios of Cute Camel Woodcraft Company and make comments on its second-year performance as compared to its first-year performance. The following shows Cute Camel’s income statement for the last two years. The company had assets of $10,575,000 in the first year and $16,916,400 in the second year. Common equity was equal to $5,625,000 in the first year, 100% of earnings were paid out as dividends in the first year, and the firm did not issue new stock in the second year. Cute Camel Woodcraft Company Income Statement For the Year Ending December 31 Year 2 Year 1 Net Sales $5,715,000 $4,500,000 Operating costs less depreciation and amortization 1,610,000 1,495,000 Depreciation and amortization $285,750 $180,000 Total Operating Costs 1,895,750 1,675,000 Operating Income (or EBIT) $3,819,250 $2,825,000 Less: Interest 381,925 226,000 Earnings before taxes (EBT) $3,437,325 $2,599,000 Less: Taxes (40%) 1,374,930 1,039,600 Net Income $2,062,395 $1,559,400 Calculate the profitability ratios of Cute Camel Woodcraft Company in the following table. Convert all calculations to a percentage rounded to two decimal places. Ratio Value Year 2 Year 1 Operating profit margin 62.78% Net profit margin 36.09% Return on total assets 14.75% Return on common equity 27.72%

Answer 1

	1st Year	2nd Year
Assets	10575000	16916400
Common equity	5625000	5625000
Net sales	4500000	5715000
Operating costs	1495000	1610000
Depreciation and amortization	180000	285750
Total operating costs	1675000	1895750
EBIT	2825000	3819250
Interest	226000	381925
EBT	2599000	3437325
Less: Taxes at 40%	1039600	1374930
Net income	1559400	2062395
Operating margin	62.78%	66.83%
Net profit margin	34.65%	36.09%
Return on total assets	14.75%	12.19%
Return on common equity	27.72%	36.66%
Basic earning power	26.71%	22.58%