Profit margin 769 total asset turnover 182 total debt rati

Profit margin = 7.69%, total asset turnover = 1.82, total debt ratio = 0.42, payout ratio = 0.57. 1) What is the return on assets? 2) What is the return on equity? Please show all steps.

Solution

1)

Total Asset Turnover = Sales/Total Assets = 1.82

Profit Margin = Net Income/Sales = 7.69 % = 0.0769

Total Asset Turnover x Profit Margin = 1.82 x 0.0769

Sales/Total Assets x Net Income/Sales = 0.13996

Net Income/Total Assets = 0.13996

Return on Assets = 0.13996 or 13.99 % or 14 %

Return on Assets is 14 %

2)

Total debt ratio = 0.42

Debt + equity = 1

Equity = 1 - Debt = 1 – 0.42 = 0.58

Debt/Equity = 0.42/0.58 = 0.724137931

As per DuPont Identity formula:

ROE = Profit Margin x Total Asset Turnover x (1 + debt/equity ratio)

       = 0.0769 x 1.82 x (1+0.724137931)

      = 0.13996 x 1. 724137931 = 0.241306897 or 24.13 %

Return on Equity is 24.13 %