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Chapter 13: Problem 12

Blare Company had a return on sales of \(6.5\) percent and an asset turnover of \(2.40\). What is Blare's return on assets?

Short Answer

Expert verified
Blare's return on assets is 15.6%.

Step by step solution

01

Understanding the Problem

We need to calculate the Return on Assets (ROA) for Blare Company. We are given the Return on Sales (ROS), which is 6.5%, and the Asset Turnover (AT), which is 2.40.
02

Formula for Return on Assets

The formula to compute Return on Assets (ROA) is:\[\text{ROA} = \text{ROS} \times \text{Asset Turnover}\]Where ROS is the Return on Sales.
03

Substitute the Values

Substitute the given values of ROS and Asset Turnover into the formula:\[\text{ROA} = 6.5\% \times 2.40\]
04

Calculate the ROA

Convert the percentage to a decimal by dividing by 100: 6.5% becomes 0.065. Then multiply:\[\text{ROA} = 0.065 \times 2.40 = 0.156\]
05

Express ROA as a Percentage

Convert the decimal result back to a percentage by multiplying by 100:\[0.156 \times 100 = 15.6\%\]So, the Return on Assets for Blare Company is 15.6%.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Return on Sales
When we talk about Return on Sales (ROS), it's essentially a measure of a company's operational efficiency. ROS indicates how much profit a company makes for every dollar of sales. It is calculated by dividing operating profit by net sales.
In Blare Company's case, a ROS of 6.5% means that the company generates $0.065 in profit for each dollar of sales. This figure helps investors understand how effectively the company's management is controlling costs relative to the revenue.
  • A higher ROS indicates better efficiency in converting sales into actual profit.
  • It offers insights into both pricing strategy and operational expenses of a firm.
Analyzing ROS is beneficial because it provides a direct link between price-setting and operational expenses, two critical aspects of running a business successfully.
Asset Turnover
Asset Turnover measures how efficiently a company uses its assets to generate sales. It's calculated as the ratio of net sales to average total assets. In simple terms, it indicates the amount of sales generated for every dollar spent on assets.
For Blare Company, an asset turnover of 2.40 implies that for every dollar invested in assets, the company produces $2.40 in sales.
  • A higher asset turnover ratio signals better utilization of company resources.
  • It reflects the company's efficiency in employing its asset base to increase revenue.
Understanding asset turnover enables investors and managers to gauge how well the business is using its investment in assets to bolster sales. It's particularly important for improvement as companies can often enhance performance by effectively managing and utilizing their asset pool.
Financial Ratios
Financial ratios are vital tools used to assess a company's performance and financial health. These ratios present complex financial data in a format that's easier to analyze, often converting figures into percentages or ratios for comparison purposes.
Through ratios like Return on Sales and Asset Turnover, investors, managers, and other stakeholders can gain insight into various aspects like profitability, efficiency, and liquidity.
  • Liquidity Ratios: Determine a company's ability to cover its short-term obligations.
  • Profitability Ratios: Assess the company's ability to generate profit from sales or investments.
  • Efficiency Ratios: Evaluate how well resources are being used within a company.
Financial ratios are essential for making informed decisions, as they help identify strengths and areas for improvement in a company's operations, ensuring a comprehensive understanding of its financial standing.

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Most popular questions from this chapter

The notes to financial statements present information on significant accounting policies, complex or special transactions, details of reported amounts, commitments, contingencies, segments, quarterly data, and subsequent events. Indicate which type of note disclosure is illustrated by each of the following notes: a. The company has agreed to purchase seven EMB-120 aircraft and related spare parts. The aggregate cost of these aircraft is approximately \(\$ 52,000,150\), subject to a cost escalation provision. The aircraft are scheduled to be delivered over the next two fiscal years. b. The company has deferred certain costs related to major accounting and information systems enhancements that are anticipated to benefit future years. Upon completion, the related cost is amortized over a period not exceeding five years. c. The company has guaranteed loans and leases of independent distributors approximating \(\$ 27,500,000\) as of December 31 of the current year. d. An officer of the company is also a director of a major raw material supplier of the company. The amount of raw material purchases from this supplier approximated \(\$ 595,000\) in the current year.

When constructing a common-sized income statement, all amounts are expressed as a percentage of: \(a\). net income. c. net sales. b. gross profit. d. income from operations.

What is the significance of the debt-to-equity ratio and how is it computed?

What does the times-interest-earned ratio indicate and how is it calculated?

Which of the following is not considered a limitation of financial statement analysis? a. Firms may use different accounting methods. b. Firms may be audited by different auditing firms. c. Inflation may distort trend analysis. d. It may be difficult to classify large conglomerate firms by industry.
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