Question

RATIO CALCULATIONS

Assume the following relationships for the Brauer Corp.:

Sales total assets 1.5x

Return on assets (ROA) 3%

Return on equity (ROE) 5%

Calculate Brauer's profit margin and debt ratio.

Answer 1

Given:

Return on Assets= 3%

Return on Equity= 5%

Sales to total Assets (Sales/Total Assets)=1.5x

ROA=Profit Margin *Assets turnover

0.03=Profit Margin*1.5

Profit Margin= 0.03/1.5= 0.02

Therefore, the profit margin is 2%

Debt Ratio= Total Debts/Total Assets

We can calculate debt ratio using ROA and the reciprocal of ROE. It is calculated as below:

Total Equity to Total Assets= ROA*1/ROE

Total Equity to total Assets= 0.03*1/0.05

Total Equity to Total Assets= 0.03*20= 0.6

Total Debt/Total Assets= 1-0.6=0.4

Therefore, the debt ratio is 40%

I hope that was helpful :)