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ROA, debt/equity, ROE

Can you walk me through the steps to solve these problems?

Lily Cosmetics has annual sales of $400,000,000

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 1.0 , what is the return on equity?

Solution Preview

Hi there,

First, here is some background info for you regarding ROA:

A useful indicator of how profitable a company is relative to its total assets. It also gives an idea as to how well the company is able to use their assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment".

Note: Some investors add interest expense back into net income when performing this calculation because they'd like to use operating returns before cost of borrowing.

ROA tells you what earnings were generated from invested capital (assets). ROA for public companies can vary substantially, but will be dependent on the industry they are in. This is why it is best when using ROA as a comparative measure to compare against a company's previous ROA numbers or the ROA of a similar company.

The ...