Profitability Ratios

The following selected data were taken from the financial statements of Vidahill Inc. for December 31, 20Y7, 20Y6, and 20Y5:

December 31

20Y720Y620Y5

Total assets$221,000 $199,000 $177,000

Notes payable (8% interest)70,000 70,000 70,000

Common stock28,000 28,000 28,000

Preferred 5% stock, $100 par14,000 14,000 14,000

(no change during year)

Retained earnings70,600 53,100 42,000

The 20Y7 net income was $18,200, and the 20Y6 net income was $11,800. No dividends on common stock were declared between 20Y5 and 20Y7. Preferred dividends were declared and paid in full in 20Y6 and 20Y7.

a. Determine the return on total assets, the return on stockholders' equity, and the return on common stockholders equity for the years 20Y6 and 20Y7. When required, round to one decimal place.

20Y720Y6

Return on total assets%%

Return on stockholders equity%%

Return on common stockholders equity%%

b. The profitability ratios indicate that the company's profitability has improved . Since the return on assets is less than the return on stockholders' equity in both years, there must be positive leverage from the use of debt.

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a. Divide the sum of net income plus interest expense by average total assets. Average total assets = (Beginning total assets + Ending total assets) 2.

Divide net income by average total stockholders'equity. Average total stockholders'equity = (Beginning total stockholders'equity + Ending total stockholders'equity) 2.

Divide net income minus preferred dividends by average common stockholders'equity. Common stockholders'equity = Common stock + Retained earnings. Average common stockholders'equity = (Beginning common stockholders'equity + Ending common stockholders'equity) 2.

b. Consider what the ratios tell you about the company's performance.