Question

Davis Company has provided the following financial data: Total Asset Turnover = 0.245 Net Income = $400,000 Equity Multiplier = 1.20 Net Sales = $1,300,000 What is the Return on Equity?

Answer 1

First we need the profit margin. We can do this with the following formula:

`\text{profit margin = }\frac{net\text{ income}}{net\text{ sales}}`

then, we have:

`\text{profit margin = }(400,000)/(1,300,000)=0.31`

Now we can find the return on equity (ROE) with the following expression:

`\text{ROE}=\text{profit margin x total asset turnover x equity multiplier}`

in this case we have the following:

`\text{ROE}_{}=(0.31)(0.245)(1.20)=0.091`

therefore, the return on equity is 9.1%