Question
Profitability Ratios The following selected data were taken from the financial statements of Robinson Inc. for December 31, 2016, 2015 and 2014: December 31 2016
Profitability Ratios
The following selected data were taken from the financial statements of Robinson Inc. for December 31, 2016, 2015 and 2014:
December 31 | |||||||
2016 | 2015 | 2014 | |||||
Total assets | $4,800,000 | $4,400,000 | $4,000,000 | ||||
Notes payable (8% interest) | 2,250,000 | 2,250,000 | 2,250,000 | ||||
Common stock | 250,000 | 250,000 | 250,000 | ||||
Preferred 4% stock, $100 par | |||||||
(no change during year) | 500,000 | 500,000 | 500,000 | ||||
Retained earnings | 1,574,000 | 1,222,000 | 750,000 |
The 2016 net income was $372,000, and the 2015 net income was $492,000. No dividends on common stock were declared between 2014 and 2016.
a. Determine the rate earned on total assets, the rate earned on stockholders' equity, and the rate earned on common stockholders' equity for the years 2015 and 2016. Round to one decimal place.
2016 | 2015 | |
Rate earned on total assets | % | % |
Rate earned on stockholders' equity | % | % |
Rate earned on common stockholders' equity | % | % |
b. The profitability ratios indicate that Robinson Inc.'s profitability has deteriorated . Because the rate of return on common stockholders' equity exceeds the rate earned on total assets in both years, there is positive leverage from the use of debt.
Feedback
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.
Learning Objective 3.
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