Question

3. If net profit is 3 percent, asset turnover is 6, and financial leverage is 2.1. what is the return on assets? What does your result mean in your own words? The Card Shoppe last year had a gross margin of $1,500,000, a net profit of $250,000, and net sales were $2,000,000. What was the Card Shoppe's net profit margin? What does your result mean in your own words? A retailer has a net profit of $1,000,000, total assets of $12,000,000, a 2.5 asset turnover and a net worth of $5,000,000. What is its financial leverage? What does your result mean in your own words?

Answer 1

3) net Profit = 3% ; asset turnover = 6 ; financial leverage = 2.1

therefore, Return on equity = net Profit*asset turnover*financial leverage {Acc. to Du Pont analysis} ...(1)

Also, ROE= Net Profit/Shareholders Equity ....(2)

Using (1) & (2), we get:

(3%of sales)/Shareholders Equity = (3% of Sales)*6*2.1

Shareholders Equity = 1/(6*2.1) = 0.07936of sales...(3)

Therefore, Financial Leverage = Total Asset/Shareholders Equity

2.1 = Total Asset/0.07936

Total Asset = 0.1667 of sales

Therefore, ROA = PAT/Total Asset = 3%of sales/0.1667 of sales = 0.03/0.1667 = 0.1799 or 0.18(approx)

Means: only able to generate 18% return on the total assets. higher preferred. ROA for companies can vary substantially and will be highly dependent on the industry. It gives investors an idea of how effective the company is in converting the money it invests into net income.

4) Net profit = $250,000 ; Net sales = $2,000,000

Therefore, Net Profit margin = Net profit/Net sales = 250,000/2,000,000 = 12.5%

Means: The firm is able to generate profit for each dollar in revenue collected by a company. for the given example firm translate 12.5% of every dollar revenue, the firm is getting net profit of 12.5 dollars for every 100 dollar revenue.

5) ROE = (Net profit/Net sales)*(Net sales/Total Assets)*(Total Assets/Shareholders Equity) ...(4)

{ROE= net Profit*asset turnover*financial leverage .....Acc. to Du Pont analysis}

Also, ROE= Net profit/Shareholders Equity ....(5)

Sahreholders Equity = Assets - Liabilities = Networth = $5,000,000 (Given)

From (4) & (5)

Net Profit/Shareholders Equity = (Net profit/Net sales)*(Net sales/Total Assets)*(Financial Leverage)

$1,000,000/$5,000,000 = ($1,000,000/Net sales)*(Net sales/$12,000,000)*(Financial Leverage)

Financial Leverage = 12,000,000/5,000,000 = 2.4

Means: The firm tells about the capital structure of the firm, whether the firm uses more of debt or equity to buy assets. In the case the firm has around 2.4 time the assets of total shareholders equity, or around 41% of total assets were consists of shareholders equity.