-Use the comparative analysis below for S&J Plumbing, Inc. to determine if S&J Plumbing's return on assets is comparable to its competitors in the same industry.
-Support your answers.
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In the following, two profitability ratios for S&J Plumbing will be compared with the ratios of the corresponding industry.
The first ratio is one of the most commonly used ratios, Return on Assets (ROA), which is defined as ROA = Net Income divided by Total Assets. The ROA measures how well the company is able to generate profits from its assets.
ROA = Net Income / Total Assets.
S&J Plumbing had a Return on Assets of 14.4% in 2010. Comparing this ratio with the industry high, median, and low ROA ratios, 19.6%, 4.1%, and -3.8%, respectively, we can conclude that the ROA for S&J Plumbing is in the high end of the industry continuum, well above the median.
The second ratio is Return on Sales (ROS), which is calculated by ROS = Net Income Before Interest and Tax divided by Sales. ROS is also called Operating Profit Margin, and it measures the company's ability to generate earnings through sales. Net ...
This solution explains the calculation of ROA (return on assets) and ROS (return on sales) of a company, then compares the ROA and ROS of S&J Plumbing, Inc. with industry averages, and finally determines the profitability of the company, using the industry averages as a guidance.
Discrepancies between income statement and balance sheet
S&J Plumbing, Inc.'s 2010 income statement shows a net profit before tax of $468, whereas the balance sheet that the company's equity for the fiscal year-end 2010 is $1,746.
a) Calculate the company's return on equity and whether the managers are providing a good return on the capital provided by the company's shareholders.
b) Diagram the operating cycle of a service company.
c) When analyzing statements, what external factors that affect business must be considered?
d) What are the similarities between a firm's capital budgeting decisions and individual investment decisions.