E132 Computing and Interpreting Profitability Ratios LO 134

E13-2 Computing and Interpreting Profitability Ratios [LO 13-4, LO 13-5] The average price of a gallon of gas in 2013 dropped $0.12 (3 percent) from $3.61 in 2012 (to $3.49 in 2013). Let\'s see whether these changes are reflected in the income statement of Insignia Corporation for the year ended December 31, 2013 (amounts in billions) Total Revenues Costs of Crude Oil and Products Other Operating Costs 2013 2012 $240 $254 130 56 124 59 Income before Income Tax Expense Income Tax Expense 57 27 68 32 Net Income $ 30 $ 36 Required 1-a. Compute the gross profit percentage for each year. (Round your answers to 1 decimal place.) Gross Profit Percentage 2013 1-b. Assuming that the change from 2012 to 2013 is the beginning of a sustained trend, is Insignia likely to earn more or less gross profit from each dollar of sales in 2014? More Gross Profit Less Gross Profit 2-a. Compute the net profit margin for each year. (Round your answers to 1 decimal place.) Net Profit Margin

Solution

i

1(a) – Gross Profit Percentage for each year

Gross Profit Percentage = [Gross Profit / Sales] x 100

2012 = [($254 – 130) / $254] x 100 = 48.8%

2013 = [($240 – 124) / $240] x 100 = 48.3%

1(b) – Less Gross Profit

2(a) – Net Profit Margin for the each year

Net Profit Margin = [Net Income / Sales] x 100

2012 = [$36 / 254] x 100 = 14.2%

2013 = [$30 / 240] x 100 = 12.5%

2(b) – Worse Job

3(a) – Fixed Asset Turnover

Fixed Asset Turnover = Sales / Average Fixed Assets

2012 = $254 / $144 = 1.76

2013 = $240 / $185 = 1.30

3(b) – In 2012

4(a) – Return on Equity [ROE]

Return on Equity [ROE] = [Net Income / Average Stockholders equity] x 100

2012 = [$36 / $144] x 100 = 25%

2013 = [$30 / $175] x 100 = 17.1%

4(b) – In 2012