Keystone Resources has a net profit margin of 8 percent and earnings after taxes of $2 million. Its current balance sheet is as follows:
|
Current assets
|
$6,000,000
|
Current liabilities
|
$3,500,000
|
|
Fixed assets
|
10,000,000
|
Long-term debt
|
5,500,000
|
|
Total assets
|
$16,000,000
|
Common stock
|
2,000,000
|
|
Total liabilities and stockholders' equity
|
$16,000,000
|
Retained earnings
|
5,000,000
|
a. Calculate Keystone's return on stockholders' equity.
b. Industry average ratios are
Net profit margin 10%
Total asset turnover 2.0 times
Equity multiplier 1.5 times
What does a comparison of Keystone to these averages indicate about the firm's strengths and weaknesses?
c. Keystone has inventories of $3.2 million. Compute the firm's quick ratio.