Gulf Controls, Inc., has a net profit margin of 10 percent and earnings after taxes of $600,000. Its current balance sheet follows:
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Current Assets
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$ 1,800,000
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Current liabilities
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$ 600,000
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Fixed assets
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2,200,000
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Long-term debt
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1,000,000
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Total Assets
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$4,000,000
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Common stock
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500,000
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|
|
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Retained earnings
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1,900,000
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|
|
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Total liabilities and Stockholder's equity
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$ 4,000,000
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|
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a. Calculate Gilf's Return on stockholder's equity.
b. The industry average ratios are as follows:
- Net Profit margin : 6%
- Total asset turnover : 2.5 times
- Equity multiplier : 1.4 times
Compare Gulf Controls with the average firm in the industry. What is the source of the major differences between the Gulf and the industry average ratios?