Question

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Considering two firms, Alpha and Beta, the sales, profits, and assets of Alpha are $20 million, $4 million, and $40 million respectively, whereas Beta's sales, profits, and assets are $8 million, $2 million, and $20 million, respectively. (1) What's the return on assets for each firm? (2) Applying the Du Pont system here to analyze the return on assets, what information you could further obtain by utilizing this method? (3) Please give me a famous brand of firm regarding each scenario: a. firm with high operating profit margin but low asset turnover; b. firm with low operating profit margin but high asset turnover. Why do you think the firms you proposed are within one of the two above categories? Essay Toolbar navigation B I U S 를 들 드 EI ili A

Answer 1

Requirement 1:

Return on Assets = Profit/Assets

Return on Assets for Alpha = 4/40 = 10%

Return on Assets for Beta = 2/20 = 10%

Eventhough the firms are operating at different level of assets & profits, they both have same Return on Assets %.

Requirement 2:

Return on Assets under Dupont System = Profit margin * Asset Turnover

= Profit/Sales * Sales/Assets

ROA under Dupont system for Alpha = 4/20 * 20/40 = 10%

ROA under Dupont system for Beta = 2/8 * 8/20 = 10%

By Applying Dupont we can obtain the info about profit margin & assets Turnover which can be used for comparison to other equal firms.