Describe the relationship among return on assets, profit margin, and asset turnover.
- Return onassets (ROA) = _____________
a. It shows how efficiently a company uses its assets to produce income.
- Return on assets can be separated to examine two important business strategies: profit margin and asset turnover.
a. Profit margin equals _______________
i. Shows the percentage of each sales dollar that results in net income.
ii. A 12.5 percent profit margin, for example, means that 12.5 cents have been earned on each dollar of sales.
b. Asset turnover equals ______________________________________
i. It shows how efficiently assets are used to produce sales.
ii. Profit Margin x Asset Turnover = Return on Assets
Practice: Allied Construction and Axis Construction reported the following information in their annual financial statements ($ in millions):
1. Calculate Allied Construction’s return on assets, profit margin, and asset turnover ratio for 2012.
2. Calculate Axis Construction’s return on assets, profit margin, and asset turnover ratio for 2012.
3. Which company has the better profit margin and which company has the better asset turnover?