The following information relates to the XYZ Corporation and owners are concerned about the profitability of the company.

INCOME STATEMENT

31-Dec-18

Sales

185,000

Cost of sales

130,300

Gross margin

54,700

Operating expenses

15,941

Earnings before interest and taxes (EBIT)

38,759

Interest charges

5,000

Earnings before taxes (EBT)

33,759

Taxes at 40%

13,504

Earnings after tax (EAT)

20,255

OTHER INFORMATION

Total assets

160,000

Stockholders, equity

95,000

Based on the above information calculate the following profitability ratios for 2018 and comment on the results.(Total 5 marks)

a)Gross profit margin(1 mark)

b)Net profit margin(1 mark)

c)Return on investment(1 mark)

d)Return on shareholders' equity(1 mark)

e)Based on the profitability ratios analyze the profitability of the XYZ corporation with respect to the use of debt financing.(1 mark)

Formulas

Gross Profit Margin = (Sales - Cost of Sales) /Sales

Net Profit Margin = Earnings After Taxes (EAT)/Sales

Return on Investment = Earnings After Taxes (EAT)/Total Assets

Return on Shareholders' Equity = Earnings After Taxes (EAT)/Stockholders' Equity