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
|
$1,800,000
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Current liabilities
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$ 600,000
|
|
Fixed assets
|
2,200,000
|
Long-term debt
|
1,000,000
|
|
Total assets
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$4,000,000
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Common stock
|
500,000
|
|
|
|
Retained earnings
|
1,900,000
|
|
|
|
Total liabilities and stockholders' equity
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$4,000,000
|
a. Calculate Gulf 's return on stockholders' 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?