Question

Roak Company and Clay Company are similar firms that operate in the same industry. Clay began operations 2 years ago and Roak started 5 years ago. In the current year, both companies pay 7% interest on their debt to creditors. The following additional information is available. Roak Company Clay Company Current Yr 1 Yr Ago 2 Yrs Ago Current Yr 1 Yr Ago 2 Yrs Ago Total asset turnover 4.6 4.3 4.5 3.0 3.0 2.6 Return on total assets 9.0% 12.6% 13.2% 5.9% 5.6% 5.3% Profit margin ratio 3.9% 4.0% 3.8% 5.8% 6.0% 5.9% Sales $485,000 $455,000 $471,000 $285,000 $245,000 $185,000 1. (a) Which company has the better profit margin

Answer 1

Answer: Clay Company

Explanation:

Based on the information given, the current, previous year and two previous years beforehand profit margins of Clay company are greater than the corresponding profit margins of Roak company.

This means that Clay company has a better profit margin and shows that they retain a higher percentage of their revenue after costs are taken out as opposed to Roak company.