Case Problem Set

1. Work through the programmed text on financial ratios. Answer each of the
questions, and be sure you understand the calculation and the meaning of each of
the ratios.

The information necessary to determine a company’s profit as a 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 divided by
$48,769, 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 tax.
4. Magnetronics had a total of $16,462 of capital at year-end 1999 and earned before
interest but after taxes (EBIAT) $1,643 during 1999. Its return on invested capital
as follows:
1,643
1999: 16,462
= 9. 98%

1,362.19
1995: 11,306
= 12. 05%

In 1999 this figure was 9.98%, which represented a decrease from the 12.05%
earned in 1995.

5. Magnetronics had $12,193 of owners’ equity and earned $1,307 after taxes in
1999. Its return on equity was 10.72%, a deterioration from the 15.22% earned
in 1995.
1,171
1995: 7,692
= 15. 22%

1,307
1999: 12,193
= 10. 72%