Q1.Work though the programmed text on financial ratio. Answer each of the questions, and
be sure you understand the calculation and the meaning of each of the ratio.
Profitability Ratios: How Profitable Is the Company?
The information necessary to determine a company’s profit as percentage of sales can be
found in the company’s income statement.
1. Magnetronics’ profit as a percentage of sales for 1999 was $ 1,307,000 divided by $ 48,769,000 or 2.68 %.
2. This represented a decrease from 3.6 % in 1995.
3. The deterioration in profitability resulted from an increase in cost of goods sold as a percentage of sales,
and from an increase in operating expenses as a percentage of sales. The only favorable factor was the
decrease in the federal income taxes.
4. Magnetronics had a total of $ 15,249,000 of capital at year-end 1999 and earned before interest but after
taxes (EBIAT) $ 1,824,000 during 1999. In 1999 this figure was 11.96 %, which represented a decrease
from 14.67 % earned in 1995.
5. Magnetronics had $ 12,193,000 of owners’ equity and earned $ 1,307,000 after taxes in 1999. Its return on
equity was 10.72 %, deterioration from 15.22 % earned in 1995.
Activity Ratios: How Well Does a Company Employ Its Assets?
1. Total asset turnover for Magnetronics in 1999 can be calculated by dividing $
48,769 into $ 22,780. The turnover deteriorated from 2.17 times in 1995 to 2.14
times in 1999.
2. Magnetronics had $ 7,380,000 invested in accounts receivables at year-end 1999.
Its average sales per day were $ 133,613.7 during 1999 and its average collection
