91Ó°ÊÓ

Ratio analysis is a basic approach to assessing a company's health by examining the relationships between key financial indicators. Ratio analysis, according to many analysts, is the most important aspect of the analytical process.

$\begin{array}{rcl}\text{Asset}\text{turnover}\text{ratio}& =& \frac{\text{Net}\text{sales}}{\frac{\text{Total}\text{asset}\text{of}2013\text{and}2014}{2}}\\ & =& \frac{\$539.9}{\frac{\$910.4+\$888.4}{2}}\\ & =& \frac{\$539.9}{899.4}\\ & =& 0.6003\text{times}\end{array}$

$\begin{array}{rcl}\text{Return}\text{on}\text{asset}& =& \frac{\text{Net}\text{income}}{\frac{\text{Total}\text{asset}\text{of}2013\text{and}2014}{2}}\\ & =& \frac{\$63.2}{\frac{\$910.4+\$888.4}{2}}\\ & =& \frac{\$63.2}{\$899.4}\\ & =& 7.03\%\end{array}$

$\begin{array}{rcl}\text{Profit}\text{margin}\text{on}\text{sales}& =& \frac{\text{Net}\text{income}}{\text{Net}\text{sales}}\\ & =& \frac{\$63.2}{\$539.9}\\ & =& 11.706\%\end{array}$

The asset turnover times the profit margin on sales provides the rate of return on assets computed for Tootsie Roll as follows:

$\begin{array}{rcl}\text{Return}\text{on}\text{Asset}& =& \text{Profit}\text{magin}\text{on}\text{sales}×\text{Asset}\text{turnover}\\ 7.03\%& =& 11.706\%×0.6003\end{array}$

Note: The answer 7.03% is the same as the rate of return on assets computed in (b) above.