Question

Peyton's Palace has net income of $13.4 million on sales revenue of $114 million. Total assets were $80 million at the beginning of the year and $88 million at the end of the year. Calculate Peyton's return on assets, profit margin, and asset turnover ratios. (Round your final answers to 1 decimal place. Enter your answers in millions. (i.e., $5,500,000 should be entered as 5.5).)

Answer 1

Answer:

Return on Assets = 159.52%

Profit Margin = 11.75%

Asset Turnover Ratio = 1.36 times

Explanation:

The computation of return on assets, profit margin, and asset turnover ratios is shown below:-

a. Return on assets

Average Total Assets = Assets in the beginning + Assets at the end ÷ 2

= ($80 million + $88 million) ÷ 2

= $168 ÷ 2

= $84 million

Return on Assets = Annual Net Income ÷ Average Total assets

= $13.4 million ÷ $84 million

= $159.52 million

b. Profit Margin

Profit Margin = Net Income ÷ Net Sales

= $13.4 million ÷ $114 million

= 11.75%

c. Assets turnover ratio

Average Total Assets = Assets in the beginning + Assets at the end ÷ 2

= ($80 million + $88 million) ÷ 2

= $168 ÷ 2

= $84 million

Asset Turnover Ratio = Net Sales ÷ Average Total assets

= $114 million ÷ $84 million

= 1.36 times