Chapter 2, Problem 20PROB

Summary Introduction

NSA's P/E ratio is 15, common stock market price per share is $30, fixed assets turnover equals 8.0, current ratio is 5, current liabilities are $300,000, net profit margin is 4%, and outstanding shares are 60,000. Return on assets and total assets turnover to be calculated.

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

$\text{Return on assets}=\frac{\text{Net income}}{\text{Total assets}}$

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.

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

Current ratio is one of the liquidity ratios which is used to measure the short-term ability of the firm to pay the firm's short-term obligations with its current assets.

$\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}$

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

$\text{Net profit margin}=\frac{\text{Net income}}{\text{Sales}}$