Company A has liabilities of $6,803,000 and stockholders' equity of $3,637,000 at the end of the current year, and sales revenue of $9,860,000 and net income of $899,080 for the year. Company B has assets of $1,610,000 and stockholders' equity of $977,750 at the end of the current year, and sales revenue of $2,010,000 and net income of $343,000 for the year.

Company A has liabilities of $6,803,000 and stockholders' equity of $3,637,000 at the end of the current year, and sales revenue of $9,860,000 and net income of $899,080 for the year. Company B has assets of $1,610,000 and stockholders' equity of $977,750 at the end of the current year, and sales revenue of $2,010,000 and net income of $343,000 for the year.

 

(a)	Calculate the debt-to-assets and net profit margin ratios for each company. (Round your answers to 2 decimal places. Omit the "%" sign in your response.)

 

	Company A	Company B
Debt-to-assets ratio	%	%
Net profit margin ratio	%	%

 

(b)	Which company has greater financing risk?
	Company A

 

(c)	Which company generates more profit per dollar of sales?
	Company B

Explanation: (a)

Debt-to-assets ratio = Total Liabilities ÷ Total Assets

Company A:

A = L + SE

A = $6,803,000 + $3,637,000 = $10,440,000

Debt-to-assets ratio = $6,803,000 ÷ $10,440,000 ≈ 0.6516 or 65.16%

Company B:

L = A – SE

L = $1,610,000 – $977,750 = $632,250

Debt-to-assets ratio = $632,250 ÷ $1,610,000 ≈ 0.3927 or 39.27%

Net Profit Margin Ratio = Net Income ÷ Sales Revenue

Company A:

Net Profit Margin Ratio = $899,080 ÷ $9,860,000 ≈ 0.0912 or 9.12%

Company B:

Net Profit Margin Ratio = $343,000 ÷ $2,010,000 ≈ 0.1706 or 17.06%

(b)

Company A has greater financing risk (65.16% of total assets) than Company B (39.27%)

(c) Company B generates more profit per dollar of sales (0.1706) than Company A (0.0912).