Calculate The Profit Margin Ratio Based On The Follow 256782

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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The profit margin ratio is an essential financial metric that measures a company's ability to generate profit from its sales revenue. It indicates the percentage of revenue that remains as profit after deducting all expenses, including taxes and interest. Calculating this ratio involves using net income and net sales figures to assess overall profitability. In this analysis, we will compute the profit margin ratio based on the provided financial data, interpret its significance, and discuss how it reflects the company's financial health.

To accurately determine the profit margin ratio, the key step is calculating net income. Although the earnings before interest and taxes (EBIT) are provided at $122,623, net income must be derived by subtracting interest expenses and taxes from EBIT. Specifically, net income is computed as follows:

Net Income = EBIT - Interest Expense - Tax Expense

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

Next, the profit margin ratio is calculated using the formula:

Profit Margin Ratio = (Net Income / Net Sales) x 100

Substituting the known values:

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

This ratio indicates that approximately 32.02% of the company's sales revenue remains as profit after all expenses are paid. A profit margin of this magnitude suggests efficient cost management and effective sales strategies, signifying a financially healthy operation in its first year.

It is essential to understand that the profit margin ratio is a crucial indicator for investors and management, providing insights into profitability levels. A higher ratio reflects better control over costs and potentially higher returns for shareholders. Conversely, a declining profit margin over time may signal rising expenses or competitive pressures impacting profitability.

Furthermore, industry benchmarks and comparisons with similar companies are necessary for comprehensive analysis. Companies operating in high-margin industries may have profit margins significantly higher than those in manufacturing or service sectors with lower margins. Therefore, contextually, the calculated 32.02% profit margin appears strong, though it should be compared against industry averages for a detailed assessment.

In conclusion, the profit margin ratio calculated at 32.02% demonstrates the company's ability to convert sales into substantial profit, indicating operational efficiency and effective expense management in the first year of operation. This ratio forms a vital part of financial analysis, guiding strategic decisions and providing stakeholders with valuable insights into company performance.

References

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  • investopedia.com. (2023). Profit Margin Ratio — Definition, Formula and Example. Retrieved from https://www.investopedia.com/terms/p/profitmargin.asp
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