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    Return on equity, return on assets ratio, and payout ratio

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    Using Kraft Foods Inc. and General Mills perform a ratio analysis for Return on equity, return on assets ratio, and payout ratio for the two most recent fiscal years and analyze the results based on the following:

    a. Operating profitability
    b. Asset utilization
    c. Risk Management

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    Solution Preview

    Let's take a look at the financial ratios for Kraft Foods Inc. and General Mills in the last years: Two common measures of profitability are the net profit margin and the return on assets ratios. Each provides a different perspective about the firm's profits.
    To measure the profitability of a company's operations, you calculate the net profit margin (NPM) by dividing "net income" with "sales". Both entries come from the income statement. Net profit margin indicates the percentage of each dollar of sales that the firm is able to flow to the bottom line as profit.
    NPM is a function of the price of the product (which produces sales revenue) and efficiency of operations (cost of goods sold). A firm selling a unique product to a captive market may be able to charge a premium price and thus generate greater NPM. Conversely, a firm selling a generic product in a highly competitive market will have a low NPM. It must be a very efficient company, or it will not survive.
    The net profit margins of our two firms illustrate these concepts. Kraft's NPM of 7.93 percent is low compared with General Mills' NPM of 8.61 percent.
    The Return on Assets ratio (ROA), which is also known as ...

    Solution Summary

    Return on equity, return on assets ratio, and payout ratio are all achieved.