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Knowledge about Ratios

1. A company has annual sales of 500,000,000 maintains a net after tax profit margin of 5% and has a sales-to-assets ratio of 4.
a. What is its return on assets?
b. If its debt/equity ratio is 0.5,what is the return on equity?

2. On average, Microlimp's accounts receivables total$40,000,000 on annual sales of $400 million.
What is Microlimp's average collection period?
3. How would the following actions affect a firm's current ratio?
a. Inventory is purchased and paid for with cash, it is not purchased on account.
b. The firm takes out a short term bank loan to pay its overdue accounts payable.
c. A customer prepays in full for specially ordered merchandise that it will take 60 days to manufacture.
d. Inventory is sold at the firm's normal 35% markup over cost.

Solution Preview

1. A company has annual sales of 500,000,000 maintains a net after tax profit margin of 5% and has a sales-to-assets ratio of 4.
a. What is its return on assets?

Return on Assets = Net Income/Total Assets
Net after tax profit margin = Net Income/sales = 5%
Net Income = 5% X 500,000,000 = 25,000,000
Sales/Assets = 4
Assets = Sales/4 = 500,000,000/4 = 125,000,000
Return on Assets = 25,000,000/125,000,000 = 20%

b. If its debt/equity ratio is 0.5,what is the return on equity?

Debt/Equity = 0.5
Total Assets = Debt + Equity
Debt + Equity = ...

Solution Summary

The solution explains the calculation of various ratios and the impact on current ratio of the given transactions.

$2.19