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Calculating Return: Sales Ratio, Assets, Equity

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S&J Plumbing, Incorporated's income statement shows a net profit before tax of $468 and net sales of $7,482 for 2010. Total assets are at $3,244. The balance sheet lists the company's equity for fiscal year ending 2010 as $1,746.

Calculate the following ratios for this company:

-Return on sales ratio (net profit margin)
-Return on assets (ROA)
-Return on equity (ROE)

Has S&J Plumbing, Incorporated delivered a good profit margin?

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Solution Summary

The expert calculates the returns, sales ratio, assets and equity.

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Dear Student:

The solution below step-by-step for S&J Plumbing:

Step 1. Analyze the given information.

Net profit before tax (net profit margin) = $468 (also called Operating margin, Net income before interest and tax, or EBIT = Earnings before income and taxes)
Net sales = $7,482
Total Assets = $3,244
Total Equity = $1,746

Step 2. Identify the formulas for the ratios needed.

Return on Sales (Net Profit Margin) = Net Income Before Interest and Tax / Sales
Return on Assets (ROA) = Net Income / Total Assets
Return on Equity (ROE) = Net Income / Total Equity

Step 3. Plug in numbers and solve.

Return on Sales = Net Income Before Interest and Tax / Sales = 468 / 7482 = 0.0625501 = 6.26%
Return on Assets (ROA) = Net Income / Total Assets = 468 / 3244 = 0.144266 = 14.43%
Return on Equity (ROE) = Net Income / Total Equity = 468 / 1746 = 0.268041 = 26.80%

Note: By convention, ROA and ROE are usually calculated using Net income after interest and ...

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