INTERMEDIATE 9. Gulf Controls, Inc., has a net profit margin of 10 percent and earnings after taxes of $600,000. Its current balance sheet follows:
Current assets $1,800,000
Fixed assets 2,200,000
Total assets $4,000,000
Current liabilities $ 600,000
Long-term debt 1,000,000
Common stock 500,000
Retained earnings 1,900,000
Total liabilities and stockholdersâ equity $4,000,000
a. Calculate Gulf âs returnonstockholdersâ equity.
b. The industry average ratios are as follows:
Net profit margin 6%
Total asset turnover 2.5 times
Equity multiplier 1.4 times
Compare Gulf Controls with the average firm in the industry. What is the source of the major differences between the Gulf and the industry average ratios?
INTERMEDIATE 9. Gulf Controls, Inc., has a net profit margin of 10 percent and earnings after taxes of $600,000. Its current balance sheet follows:
Current assets $1,800,000
Fixed assets 2,200,000
Total assets $4,000,000
Current liabilities $ 600,000
Long-term debt 1,000,000
Common stock 500,000
Retained earnings 1,900,000
Total liabilities and stockholdersâ equity $4,000,000
a. Calculate Gulf âs returnonstockholdersâ equity.
b. The industry average ratios are as follows:
Net profit margin 6%
Total asset turnover 2.5 times
Equity multiplier 1.4 times
Compare Gulf Controls with the average firm in the industry. What is the source of the major differences between the Gulf and the industry average ratios?
Related questions
Ratio Analysis
The Vanguard Group, Inc. has compiled the following financial statements and comparative financial ratios for the year-end review.
| Balance Sheet | ||
| Assets | ||
| Current assets | ||
| âCash | $ 118,750 | |
| âAccounts receivable | 296,250 | |
| âInventory | 303,750 | |
| âTotal current assets | $ 718,750 | |
| Gross fixed assets | $625,000 | |
| Less: Accumulated depreciation | 93,750 | |
| Net fixed assets | 531,250 | |
| Total assets | $1,250,000 | |
| Liabilities and stockholdersâ equity | ||
| Current liabilities | ||
| âAccounts payable | $ 111,250 | |
| âNotes payable | 211,250 | |
| âAccruals | 108,750 | |
| ââTotal current liabilities | $ 431,250 | |
| Long-term debt | 235,000 | |
| ââTotal liabilities | $ 666,250 | |
| Stockholdersâ equity | ||
| âCommon stock | 318,750 | |
| âRetained earnings | 265,000 | |
| ââTotal stockholdersâ equity | $ 583,750 | |
| Total liabilities and stockholdersâ equity | $1,250,000 | |
| Income Statement | |||
| Sales revenue | $1,680,000 | ||
| Cost of sales | 1,362,480 | ||
| Gross profits | $ 317,520 | ||
| Less: Operating expenses | |||
| Selling expense | $ 125,600 | ||
| General and administrative expense | 81,600 | ||
| Depreciation expense | 24,000 | ||
| âââTotal operating expense | $231,200 | ||
| Operating profits | $ 86,320 | ||
| Less: Interest expense | 15,600 | ||
| Net profits before taxes | $ 70,720 | ||
| Less: Taxes (40%) | 28,288 | ||
| Net profits after taxes | $ 42,432 | ||
| Historical and Industry Average Ratios | ||||
| Industry Average | ||||
| Ratio | 2005 | 2006 | 2007 | 2007 |
| Current ratio | 1.6 | 1.7 | â | 1.6 |
| Quick ratio | 0.9 | 1.0 | â | 0.9 |
| Inventory turnover | 6.0 | 5.0 | â | 8.4 |
| Average collection period | 40 days | 50 days | â | 40 days |
| Total asset turnover | 1.5 | 1.5 | â | 1.75 |
| Debt ratio | 60% | 56% | â | 50% |
| Times interest earned | 2.5 | 3.5 | â | 4.0 |
| Gross profit margin | 20% | 19.7% | â | 20% |
| Operating profit margin | 4.7% | 4.8% | â | 6% |
| Net profit margin | 2.0% | 2.3% | â | 3% |
| Return on investment | 3.0% | 3.5% | â | 5.25% |
| Return on equity | 7.5% | 7.95% | â | 10.5% |
1. Prepare an executive summary on the firmâs overall financial condition and performance. Your summary must be at least one page, but no more than 3 pages. Comment on the meaning of each ratio, discussing its trend and its comparison to the industry average.
