Companies in the same line of business usually have similar investments and capital structures, and an opportunity for similar rates


Companies in the same line of business usually have similar investments and capital structures, and an opportunity for similar rates of return. One of the key performance indicators that is used to assess the profitability of companies is the return on assets ratio. This ratio results from two key relationships- the profit margin and the total asset turnover- and in general terms can be written as follows:
Return on assets = Total asset turnover (or Sales/Total assets) x Prof it margin (or Income/Sales)
This says that profitability depends directly on how many sales dollars are generated for each dollar invested in assets (total asset turnover) and on how costs are controlled for each dollar of sales (profit margin). An increase in either ratio results in an increase in the return on assets. As property, plant, and equipment is often the largest single asset on the balance sheet, companies need to have strategies to manage their investment in such assets.
Access the financial statements of two companies that are in the food distribution business: Empire Company Limited for the year ended May 5, 2012, and Loblaw Companies Limited for the year ended December 31, 2011. These are available at or each company's website. Review the financial statements and answer the following questions.
(a) At each company's year end, determine the percentage of property, plant, and equipment to
total assets.
(b) Calculate each company's fixed asset turnover, total asset turnover, and profit margin (using net income) for the most recent year.
(c) Determine the return on assets for each company. Which company is more profitable?
(d) Which company appears to use its total assets more effectively in generating sales? Its fixed
(e) Are there any differences in accounting policies that might explain the differences in the fixed asset turnover ratios?
(f) Examine the leasing note for each company. How might the amount of assets that are leased
impact the above asset turnover ratios?
(g) Which company has better control over its expenses for each dollar of sales? How do you
explain the asset turnover ratios and the profit ratio comparisons?
Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
Asset Turnover
Asset turnover is sales divided by total assets. Important for comparison over time and to other companies of the same industry. This is a standard business ratio.
The word "distribution" has several meanings in the financial world, most of them pertaining to the payment of assets from a fund, account, or individual security to an investor or beneficiary. Retirement account distributions are among the most...

This problem has been solved!

Do you need an answer to a question different from the above? Ask your question!

Step by Step Answer:

Related Book For  answer-question

Intermediate Accounting

ISBN: 978-0176509736

10th Canadian Edition, Volume 1

Authors: Donald Kieso, Jerry Weygandt, Terry Warfield, Nicola Young,

View Solution
Create a free account to access the answer
Cannot find your solution?
Post a FREE question now and get an answer within minutes. * Average response time.
Question Posted: September 18, 2015 12:11:52