Question

A company has annual sales of $160 million, a net profit margin of 4%, and total assets of $90 million. It carries $10 million in accounts receivable, $25 million in inventory, has $55 million in total debt, and 5 million shares of common stock outstanding. Based on this information, the company's return on equity (ROE) is

Answer 1

Answer:

18.29%

Explanation:

Return on Equity is the net profit available for equity/ Total equity value.

Total equity = Total assets - Total debt

= $90 million - $55 million = $35 million

Earnings for equity = Annual sales $\times$ net profit margin 4%

= $160 million $\times$ 4% = 6.4 million

Therefore, return on equity = $\frac{Net\ profit\ for\ equity}{Total\ value\ of\ equity}$

= $\frac{6.4\ million}{35\ million} \times 100 = 18.2857$

Therefore, ROE = 18.29%