Calculating Profitability Ratios For Here And Gone Inc
Calculating Profitability Ratios Lo 2here And Gone Inc
Problem 3-2 Calculating Profitability Ratios [LO 2] Here and Gone, Inc., has sales of $19.5 million, total assets of $14.5 million, and total debt of $5.3 million. Assume the profit margin is 8 percent.
Requirement 1: What is net income? (Do not include the dollar sign ($). Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
Requirement 2: What is ROA? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)
Requirement 3: What is ROE? ( Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)
Paper For Above instruction
Analyzing profitability ratios provides crucial insights into a company's efficiency in generating profit relative to its sales, assets, and equity. This paper explores the calculation of net income, Return on Assets (ROA), and Return on Equity (ROE) for Here and Gone, Inc., based on the given financial data, emphasizing the significance of these ratios in financial analysis.
Introduction
Profitability ratios are vital indicators used by investors, creditors, and management to evaluate a company's financial health and operational efficiency. These ratios help to assess the ability of a business to generate earnings relative to sales, assets, and shareholders' equity. The specific ratios analyzed in this context include net income, ROA, and ROE, which collectively offer a comprehensive view of profitability from different vantage points.
Computation of Net Income
Given data includes sales of $19.5 million and a profit margin of 8%. The profit margin is defined as net income divided by sales. Therefore, net income can be calculated using the formula:
Net Income = Net Profit Margin × Total Sales
Applying the data:
Net Income = 0.08 × 19,500,000 = 1,560,000
Thus, the net income for Here and Gone, Inc., is $1,560,000. This figure reflects the company's profitability after all expenses, taxes, and interest are deducted from total sales.
Calculation of Return on Assets (ROA)
ROA measures how effectively a company utilizes its assets to generate profit. It is calculated as:
ROA = (Net Income / Total Assets) × 100
Using the net income obtained and total assets of $14.5 million:
ROA = (1,560,000 / 14,500,000) × 100 ≈ 10.77%
Rounded to two decimal places, the ROA for Here and Gone, Inc., is approximately 10.77%. This indicates that the company earns about 10.77 cents for every dollar of assets it owns.
Calculation of Return on Equity (ROE)
ROE evaluates how effectively the company uses shareholders’ equity to generate profits. It is calculated as:
ROE = (Net Income / Shareholders' Equity) × 100
Shareholders' equity is the difference between total assets and total debt (liabilities):
Shareholders' Equity = Total Assets - Total Debt = 14,500,000 - 5,300,000 = 9,200,000
Using this in the ROE formula:
ROE = (1,560,000 / 9,200,000) × 100 ≈ 16.96%
Rounded to two decimal places, the ROE of Here and Gone, Inc., is approximately 16.96%. This ratio indicates the return generated for shareholders based on their invested equity.
Conclusion
In summary, the profitability analysis of Here and Gone, Inc., reveals a net income of $1,560,000, an ROA of approximately 10.77%, and an ROE of about 16.96%. These metrics provide valuable insights into the company's operational efficiency and financial performance, aiding stakeholders in making informed decisions. Robust profitability ratios reflect well on the company's ability to manage its assets and equity effectively, which is critical in maintaining investor confidence and sustaining growth.
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