45 FINANCIAL RATIOS DuBois Furniture Inc reported these figu

45. FINANCIAL RATIOS DuBois Furniture, Inc., reported these figures for 20x7 and 20x6: 20x7 20x6 Income statement: 17,400,000 $7,100,000 18,700,000 Interest expense . Net income Total assets.er Preferred stock, $1.30, no-par, 12,000,0001 Balance sheet: 100,000 shares issued and outstanding 2,500,000 2,500,000 Common stockholders\' equity 164,000,000 151,000,000 Total stockholders\' equity. ..166,500,000 153,500,000 Compute rate of return on total assets and rate of return on common stockholders\' equity for 20x7. Do these rates of return suggest strength or weakness? Give your reason.

Solution

Return on total assets (ROTA) = Earnings before Interest and Taxes (EBIT)/ Total Net Assets

EBIT= $ 17,400,000 + $12,000,000= $ 29,400,000

Total Net Assets= $ 351,000,000.

ROTA= $ 29,400,000/351,000,000= 0.084

Return on common stockholders= (Net Income- Preferred Dividend)/Average Common Stockholders equity

=( $12,000,000- $1.3* 100,000)/ $ 164,000,000= 0.0723

The rates suggest strength as the return is positive. For the capital invested there is a positive return.