Return on Assets and Asset Turnover Last year the Miller Co

Return on Assets and Asset Turnover - Last year, the Miller Company reported a return on assets of 15 percent an asset turnover of 1.6. In the current year, the company reported a return on assets of 19 percent but an asset turnover of only 1.2. If sales revenue remained unchanged from the last year to the current year, what would explain the two ratio results?

Solution

Return on assets= Net income/assets

=(Net income/sales)*(sales/assets)= Profit margin* asset turnover

last year:

profit margin=15%/1.6=9.38%

this year profit margin=19%/1.2=15.83%

This is because the company able to increase profit margin than last year by reducing costs