17-38 Financial Ratios The annual reports of Milano SpA, an Italian clothing chain, included the following selected data (in millions): 20X2 20X1 20X0 Annual amounts: Net income 90* 60 25 Gross margin on sales 520 380 200 Cost of goods sold 980 620 300 Operating expenses 380 295 165 Income tax expense 50 25 10 Dividends declared and paid 35 15 5 End-of-year amounts: Long-term assets Long-term debt Current liabilities Cash Accounts receivable Merchandise inventory Paid-in capital Retained income *E is the European euro. 240 220 180 85 65 40 65 55 35 201 5 10 85 70 40 120 85 60 205 205 205 110 55 10 During each of the three years, 10 million shares of common stock were outstanding. Assume that all sales were on account and that the applicable market prices per share of stock were 90 for 20X1 and 117 for 20X2. 1. Compute each of the following for each of the last two years, 20X1 and 20X2: a. Rate of return on sales b. Rate of return on stockholders' equity c. Current ratio d. Ratio of total debt to stockholders' equity e. Ratio of current debt to stockholders' equity f. Gross profit rate 766 PART 5 BASIC FINANCIAL ACCOUNTING g. Average collection period for accounts receivable h. P/E ratio i. Dividend-payout percentage j. Dividend yield 2. Answer yes or no to each of these questions and indicate which of the computations in number 1 support your answer: a. Have business operations improved? b. Has gross profit rate improved? c. Has the rate of return on sales deteriorated? d. Has the rate of return on owners' investment increased? e. Is there a decrease in the effectiveness of collection efforts? f. Are dividends relatively more generous? g. Have the risks of insolvency changed significantly? h. Has the market price of the stock become cheaper relative to earnings? i. Has there been a worsening of the company's ability to pay current debts on time? j. Has there been a decline in the cash return on the market value of the capital stock? k. Did the collectibility of the receivables improve? 3. Basing your observations on only the available data and the ratios you computed, prepare some brief comments on the company's operations and financial changes during the three years.