Answer:
Details Year 2 Year 1
Operating profit margin 53.27% 46.77%
Net income margin 35.95% 30.51%
Return on total assets 12.51% 12.98%
Return on common equity 36.53% 24.41%
Comments:
1. St. McStanky Beer Co. income generation from operation improved in year 2 by 6.50% as it increased to 53.27% in Year 2 from 46.77% in Year 1.
2. St. McStanky Beer Co. net income generation improved in year by 5.44% as it increased to 35.95% in Year 2 from 30.51% in Year 1.
3. The assets of St. McStanky Beer Co. are less profitable in generating revenue in year 2 as it decreased by 0.84% to 12.51% in Year 2 from 12.98% in Year 1.
4. St. McStanky Beer Co. earns more net income per investment dollar as it returns on common equity improved by 12.11% to 36.53% in Year 2 from 24.41% in Year 1.
Explanation:
The profitability ratios are calculated as follows:
a. Operating profit margin
Operating margin = Operating Income / Net Sales
Year 2 Operating margin = 2,368 / 4,445 = 0.5327, or 53.27%
Year 1 Operating margin = 1,637 / 3,500 = 0.4677, or 46.77%
b. Net income margin
Net income margin = Net income / Net Sales
Year 2 Net income margin = 1,598 / 4,445 = 0.3595, or 35.95%
Year 1 Net income margin = 1,068 / 3,500 = 0.3051, or 30.51%
c. Return on total assets
Return on total assets = Net income / Total assets
Year 2 Return on total assets = 1,598 / 13,157 = 0.1215, or 12.15%
Year 1 Return on total assets = 1,068 / 8,225 = 0.1298, or 12.98%
d. Return on common equity
Return on common equity = Net income / Common equity
Since the firm did not issue new stock during either year, we use the same common equity for the two years as follows:
Year 2 Return on common equity = 1,598 / 4,375 = 0.3653, or 36.53%
Year 1 Return on common equity = 1,068 / 4,375 = 0.2441, or 24.41%