Calculate The Profit Margin Ratio Based On The Following Inf

Calculate The Profit Margin Ratio Based On The Following Informati

Calculate the profit margin ratio based on the following information: Cash: $14,870; Accounts receivable: $22,108; Prepaid: $3,010; Supplies: $927; Equipment: $62,150; Accumulated depreciation: $13,750; Accounts payable: $28,000; Net sales: $325,000; Interest expense: $6,000; Tax expense: $12,600; Earnings before interest and taxes: $122,623; Number of shares outstanding: 335,000. Round to two decimals.

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Financial ratios serve as vital indicators of a company's performance, efficiency, and profitability. Among these, the profit margin ratio is essential as it reveals the percentage of revenue that translates into profit after all expenses are deducted. Calculating the profit margin ratio provides insights into the firm's ability to control costs and generate earnings from sales. This paper aims to calculate the profit margin ratio using provided financial data, exemplifying how this ratio can be derived and interpreted in a real-world context.

To compute the profit margin ratio, the primary formula is:

The profit margin ratio = (Net Profit / Net Sales) × 100%

Given the data, the net profit can be inferred from the earnings before interest and taxes (EBIT) by subtracting interest expense and tax expense, as taxes and interest are typically deducted after EBIT. Therefore:

Net Profit = Earnings Before Interest and Taxes (EBIT) - Interest Expense - Tax Expense

Substituting the provided figures:

  • EBIT = $122,623
  • Interest Expense = $6,000
  • Tax Expense = $12,600

Calculating net profit:

Net Profit = $122,623 - $6,000 - $12,600 = $104,023

Next, the profit margin ratio is calculated as:

Profit Margin Ratio = (Net Profit / Net Sales) × 100%

Profit Margin Ratio = ($104,023 / $325,000) × 100% ≈ 32.02%

This ratio indicates that approximately 32.02% of the company's sales revenue is converted into net profit, reflecting efficient cost management and profitability. A higher profit margin generally signifies better profitability and operational efficiency, which are crucial for investor confidence and strategic decision-making.

In conclusion, based on the provided financial data, the profit margin ratio of the company is approximately 32.02%. This metric serves as a key indicator for assessing the company's ability to generate profit from sales and is instrumental in comparative financial analysis across industries and competitors.

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