Chapter 2, Problem 15PROB

Summary Introduction

The total assets turnover of BBQ is 2.0, return on equity (ROE) is 15%, and debt ratio is 60%.

Calculate the return on assets (ROA) and net profit margin.

The total asset turnover ratio is the efficiency ratio which is used to measure how much sales is generated by using the firm's total assets.

$\text{Total assets turnover ratio}=\frac{\text{Net sales}}{\text{Total assets}}$

Return on equity is used to measure the financial performance that owners of the common stock of a company receive on their shareholdings.

$\text{Return on equity}=\frac{\text{Net income}}{\text{Equity}}$

Debt ratio is the percentage of total debts divided by total assets which measures the percentage of liabilities of a firm in terms of total assets. A higher ratio indicates that the firm is at risk.

$\text{Debt ratio}=\frac{\text{Total debt}}{\text{Total assets}}$

Return on assets is used to measure how profitable a firm is related to the firm's total assets.

$\begin{array}{cc}\text{Return on assets}& =\frac{\text{Net income}}{\text{Total assets}}\hfill \\ & =\frac{\text{Common equity}}{\text{Total assets}}\times \frac{\text{Net income}}{\text{Common equity}}\hfill \\ & =\left(1-\text{Debt ratio}\right)\times ROE\hfill \end{array}$

Net profit margin is a profitability ratio which is used to measure the percentage of revenue available after deducting operating expenses, interest, and taxes.

$\begin{array}{cc}\text{Net profit margin}& =\frac{\text{Net income}}{\text{Sales}}\hfill \\ & =\frac{\left(\frac{\text{Net income}}{\text{Total assets}}\right)}{\left(\frac{\text{Sales}}{\text{Total assets}}\right)}\hfill \\ & =\frac{ROA}{\text{Total assets turnover}}\hfill \end{array}$