Question
Roak Company and Clay Company are similar firms that operate in the same industry. Clay began operations 2 years ago and Roak started 5 years
Roak Company and Clay Company are similar firms that operate in the same industry. Clay began operations 2 years ago and Roak started 5 years ago. In the current year, both companies pay 8% interest on their debt to creditors. The following additional information is available.
| Roak Company | Clay Company | |||||
|---|---|---|---|---|---|---|
| Current Year | 1 Year Ago | 2 Years Ago | Current Year | 1 Year Ago | 2 Years Ago | |
| Total asset turnover | 4.1 | 3.8 | 4.0 | 2.5 | 2.5 | 2.1 |
| Return on total assets | 10.0% | 11.6% | 12.2% | 6.9% | 6.6% | 6.3% |
| Profit margin ratio | 3.4% | 3.5% | 3.3% | 4.8% | 5.0% | 4.9% |
| Sales | $460,000 | $430,000 | $446,000 | $260,000 | $220,000 | $160,000 |
1. (a) Which company has the better profit margin? (b) Which has the better asset turnover? (c) Which has the better return on assets? 2. Which company has the better rate of growth in sales? 3. Did the company successfully use financial leverage in the current year, as judged by return on assets exceeding its interest rate on debt, in the case of (a) Roak and (b) Clay?
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The Power Of Accounting What The Numbers Mean And How To Use Them
Authors: Lawrence Lewis
1st Edition
0415884306, 978-0415884303
