Question

Kindly answer all the Requirements!

Consider the following condensed financial statements of Safe Money, Inc. The company's target rate of return is 10% PEE (Click the icon to view the comparative balance sheet.) (Click the icon to view the income statement.) Read the requirements Requirement 1. Calculate the company's ROI. Round all of your answers to four decimal places. Begin by selecting the formula to calculate return on investment (ROI), and then enter the amounts to calculate the company's ROI. (Round your calculations to four decimal places and enter your final to the nearest hundredth of a percent, X.XX%) ROI

Kindly answer all the Requirements

Answer 1

(1) The return on investment ratio (ROI), also known as the return on assets ratio, is a profitability measure that evaluates the performance or potential return from a business or investment. The ROI formula looks at the benefit received from an investment, or its gain, divided by the investment's original cost.ROI serves as a returns ratio, allowing a business owner to calculate how efficiently the company uses its total asset base to generate sales. Total assets include all current assets such as cash, inventory, and accounts receivable in addition to fixed assets such as the plant buildings and equipment.

Formula: Return on investment =Net income (investment gain)/cost of investment(total assets)

So here 53300 is the net income of the firm at the end of the year 2018 which has to be divided by 413000 which is the total assets of the company that is 53300/587000=9.080%

(2) Profit margin ratio: The profit margin ratio, also called the return on sales ratio or gross profit ratio, is a profitability ratio that measures the amount of net income earned with each dollar of sales generated by comparing the net income and net sales of a company. In other words, the profit margin ratio shows what percentage of sales are left over after all expenses are paid by the business.

Formula: profit margin ratio=Net income /Net sales.

So here net income is 53300 and net sales is 2000000.Thus the ratio becomes 2.7% or 2.665%.From this calculation we can understand that the company could convert only around 3% of their sales into profit.This means that the company has 0.025 net income for every value of sales which is very little . The higher the ratio the efficient is the company in cost control.So here the firm should take steps to cut down costs.

(3)Asset turnover ratio: The asset turnover ratio is an efficiency ratio that measures a company’s ability to generate sales from its assets by comparing net sales with average total assets. In other words, this ratio shows how efficiently a company can use its assets to generate sales.he total asset turnover ratio calculates net sales as a percentage of assets to show how many sales are generated from each dollar of company assets.

Formula=Net sales /Average total assets.

So here 2000000 is divided by 587000 becomes 3.4.A higher ratio is favorable, as it indicates a more efficient use of assets. Conversely, a lower ratio indicates the company is not using assets as efficiently. This can be due to excess production capacity, poor collection methods, or poor inventory management.

(4)Interpretation: The higher the return on investment ratio, the more efficiently the company is using its asset base to generate sales.A positive ratio shows that returns exceed costs and opposite means costs outweigh returns.

(5)Residual income measures the excess of the income earned over the desired income. The desired income is based on a minimum required rate of return

RI

=

Operating income - Desired income

where: Desired income = Minimum required rate of return x Operating assets

Here the operating income becomes 100000 and the desired income is 587000*10%(cost of capital).Thus the ratio becomes 1.70%.The residual income approach is the measurement of the net income that an investment earns above the threshold established by the minimum rate of return assigned to the investment. It can be used as a way to approve or reject a capital investment, or to estimate the value of a business.Here the targeted rate of return is 10% and the RI is only 1.7% which requires adequate improvement