The following shows Triptych Food Corp.\'s income statement for the last two yea
ID: 2811648 • Letter: T
Question
The following shows Triptych Food Corp.'s income statement for the last two years. The company had assets of $10,575 million in the first year and $16,916 million in the second year. Common equity was equal to $5,625 milon in the first year, 100% of earnings were paid out as dividends in the first year, and the firm did not issue new shares in the second year Triptych Food Corp Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Yar 1 4,500 1,268 180 1,448 064 3,052 244 2,808 1,123 1,685 Net sales 5,715 1,365 286 1,651 Operating costs excluding depreciation and amortization Depreciation and amortization Total operating costs Operating income (or EBIT) Less: Interest Earnings before taxes (EBT) Less: Taxes (40%) Net income 549 3,515 1,406 2,109 Calculate the profitability ratios of Triptych Food Corp. in the following table. Convert all calculations to a percentage rounded to two decimal places Ratio Value Year 2 Year 1 Net profit margin Return on total assets Return on common equity Basic earning power 36.90% 15.93% 29.96% 24.03%Explanation / Answer
Answer a.
Year 2:
Return on Total Assets = Net Income / Total Assets
Return on Total Assets = $2,109 / $16,916
Return on Total Assets = 12.47%
Return on Common Equity = Net Income / Common Equity
Return on Common Equity = $2,109 / $5,625
Return on Common Equity = 37.49%
Year 1:
Net Profit Margin = Net Income / Net Sales
Net Profit Margin = $1,685 / $4,500
Net Profit Margin = 37.44%
Basic Earnings Power = Operating Income / Total Assets
Basic Earnings Power = $3,052 / $10,575
Basic Earnings Power = 28.86%
Answer b.
A higher operating profit margin than the industry average indicates either lower operating costs, higher product pricing, or both.
An increase in a company’s earnings means that the net profit margin is increasing.