Question

A business has a profit margin above the industry average, yet its ROA is equal to the industry average. Is this possible?

1. No
2. Yes, if TOTAL ASSET TURNOVER is below the industry average
3. Yes, if the Business has no liabilities
4. Yes, if the EQUITY MULTIPLIER is below the industry average
5. Yes, it is possible, but b,c and d above are not the correct reason

Answer 1

Answer : Correct Option is Yes, if TOTAL ASSET TURNOVER is below the industry average

Reason :

Return on Assets = Net Income / Total Assets

Retrun on Assets = (Net Income / Sales ) * (Sales / Total Assets)

Return on Assets = Net profit Margin * Total asset Turnover

so if Return on Asset is equal to the industry average and profit margin above the industry average , there is a possilbilty that TOTAL ASSET TURNOVER is below the industry average as this will make Return on Asset equal to the industry average.