Question of the Week

XYZ Corp. has an asset turnover ratio of 0.75. Because the economy is currently sluggish, the firm cannot raise this ratio any higher than what it is. However, if the firm wanted to boost its return on assets to 16%, which of the following scenarios would help them achieve that?

a) An equity turnover of 1.2.
b) A profit margin of 21.33%.
c) A return on equity of 14.3%.
d) A debt-to-asset ratio of 0.62.

Answer:

The correct answer is: b)

Return on Assets = NI/Sales = Sales/Assets x NI/Sales

.16 = 0.75 x (NI/Sales)

Therefore, NI/Sales = .16/.75 = 21.33%