Question

Exercise 9-20 a Carla Vista Co. reports the following information (in millions) during a recent year: net sales, $10,125.3; net earnings, $320.8; total assets, ending, $4,550.0; and total assets, beginning, $5,475.0. (a) Calculate the (1) return on assets, (2) asset turnover, and (3) profit margin. (Round answers to 1 decimal place, e.g. 6.2% and 6.2.)

Answer 1

1. Return on assets (ROA): 6.4%

2. Asset turnover: 2.0

3. Profit margin: 3.2%

Step-by-step explanation:

Asset turnover helps investors understand how effectively companies are using their assets to generate sales. Asset turnover is calculated by using following formula:

Asset Turnover = Total Sales or Revenue/ Average Total Assets

(Beginning Assets + Ending Assets )/2

where:

Total Sales=Annual net sales total

Average Total Assets = (Beginning Assets + Ending Assets )/2 = (Assets at the beginning of year +Assets at end of year )/2

Return on assets (ROA) helps an investor see how much after-tax profit a company gained for each dollar in assets, is calculated by formula:

ROA = Net Income/ Average Total Assets

The profit margin reflects a company's overall ability to turn income into profit, is calculated by formula:

Profit margin = Net income/Net sales

In Carla Vista Co., :

Average Total Assets = ($5,475.0 + $4,550.0)/2 = $5,012.5

1. Return on assets (ROA) = $320.8/$5,012.5 = 0.064 = 6.4%

2. Asset turnover = $10,125.3/$5,012.5 = 2.0

3. Profit margin = $320.8/$10,125.3 = 0.032 = 3.2%