Question 1184492: Net sales are 20 times as great as net income. If the sales are turn over 3 times during the year, what is the rate of return on assets? Answer by CPhill(1959) (Show Source):
You can put this solution on YOUR website! Here's how to calculate the rate of return on assets (ROA) given the information provided:
1. **Calculate the profit margin:**
Profit margin is calculated as Net Income / Net Sales. We're told that Net Sales are 20 times greater than Net Income. This means:
Net Sales = 20 * Net Income
Therefore:
Profit Margin = Net Income / (20 * Net Income) = 1/20 = 0.05 or 5%
2. **Calculate the total asset turnover:**
We are given that sales turnover 3 times during the year. This is also called asset turnover.
Total Asset Turnover = Net Sales / Average Total Assets
We know that Total Asset Turnover is 3.
3. **Calculate the Return on Assets (ROA):**
ROA is calculated as Profit Margin * Total Asset Turnover.
ROA = Profit Margin * Total Asset Turnover
ROA = 0.05 * 3
ROA = 0.15 or 15%
Therefore, the rate of return on assets is 15%.
