Final answer:
Sandlake Company's return on assets can be calculated by dividing its net income ($20,000) by its average total assets ($200,000), resulting in a return on assets of 10%. Return on assets demonstrates how effectively a company uses its assets to generate profits.
Step-by-step explanation:
The student has asked about calculating Sandlake Company's return on assets (ROA), which is a financial ratio that measures the profitability of a company relative to its total assets.
Based on the information provided, Sandlake Company has a net income of $20,000 and average total assets of $200,000. Thus, the calculation for Sandlake's ROA would be $20,000 divided by $200,000, resulting in an ROA of 0.1 or 10%.
ROA is an important indicator of how efficiently a company is using its assets to generate profit. A higher ROA indicates that the company is more effectively converting its investment in assets into net income. The formula for ROA can also be expressed as ROA = (Net Income / Sales) × (Sales / Average Total Assets), which breaks down the ROA into two components: the net profit margin and the asset turnover ratio.
This helps one understand that ROA can be improved by increasing net profit margins, increasing asset turnover, or a combination of both strategic approaches. For the Sandlake Company, maintaining or improving its 10% ROA may involve efforts to enhance efficiency and profitability.