Profitability Ratios

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

		December 31
		20Y7		20Y6		20Y5
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 20Y7 net income was $372,000, and the 20Y6 net income was $492,000. 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 rate earned on stockholders' equity, and the return on common stockholders equity for the years 20Y6 and 20Y7. Round to one decimal place.

	20Y7	20Y6
Return on total assets	%	%
Rate earned on stockholders' equity	17.32%	28.34%
Return on common stockholders equity	21.36 %	38.19%

b. The profitability ratios indicate that Vidahill 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.