Final answer:
The ROA for Goshen Industrial Sales is calculated using the formula: Net Income divided by Total Assets. Net Income is obtained by multiplying sales by profit margin, and Total Assets is derived from total equity and the debt-equity ratio. The calculated ROA is 4.56%.
Step-by-step explanation:
The student is asking how to calculate the Return on Assets (ROA) for Goshen Industrial Sales. ROA is a financial metric that indicates how effectively a company uses its assets to generate profits. To calculate ROA, we divide the company's net income by its total assets. The net income can be found by multiplying the profit margin (PM) by sales. However, we do not have the total assets directly, but we do have the debt-equity ratio (D-Eq ratio), which is used to infer the proportion of debt-to-equity financing the company uses.
The formula for ROA is:
ROA = (Net Income / Total Assets) × 100%
To find the net income, we use the Profit Margin and Sales:
Net Income = Sales × Profit Margin
First, let's calculate the net income:
Net Income = $828,900 × 4.6%
Net Income = $38,129.40
Next, we calculate the total assets using the debt-equity ratio and total equity (TE). Since the debt-equity ratio equals debt divided by equity
Total Debt = Total Equity × Debt-Equity Ratio
Total Debt = $539,200 × 0.55
Total Debt = $296,560
Now, we find the total assets, knowing that:
Total Assets = Total Debt + Total Equity
Total Assets = $296,560 + $539,200
Total Assets = $835,760
Finally, we can find the ROA:
ROA = ($38,129.40 / $835,760) × 100%
ROA = 4.56%