Question

Easter Egg and Poultry Company has $1,440,000 in assets and $617,000 of debt. It reports net income of $175,000.

a. What is the firm’s return on assets?

b. What is its return on stockholders’ equity?

c. If the firm has an asset turnover ratio of 2.1 times, what is the profit margin (return on sales)?

Answer 1

(a)-Return on Assets

Return on Assets = (Net Income / Total Assets) x 100

= ($175,000 / $14,40,000) x 100

= 12.15%

(b)-Return on Stockholders’ Equity

Total Assets = $14,40,000

Total Debt = $617,000

Therefore, the Total Equity = Total Assets – Total Debt

= $14,40,000 - $617,000

= $823,000

Return on Stockholders’ Equity = (Net Income / Total Equity) x 100

= ($175,000 / $823,000) x 100

= 21.26%

(c)- Profit Margin (Return on sales)

Total Assets Turnover = Sales / Total Assets

2.10 = Sales / $14,40,000

Sales = $14,40,000 x 2.10

Sales = $30,24,000

Profit Margin = (Net Income / Sales) x 100

= ($175,000 / $30,24,000) x 100

= 5.79%