ROA Sample Problems

Return On Assets

SAMPLE PROBLEMS

1. For the corporations listed below, calculate the asset turnover for each year by multiplying the profit margin and asset turnover. Record your answers in the space provided.

(in 000's)

CADEUJANE CO.	6/30/06	6/30/05	6/30/04
Profit Margin	2.70%	-8.50%	5.90%
Asset Turnover	1.14	0.97	0.70
Return on Assets	3.08%	-8.25%	4.15%

JUDY ABBOT CO.	12/31/06	12/31/05	12/31/04
Profit Margin	18.80%	16.60%	15.80%
Asset Turnover	1.15	1.20	1.17
Return on Assets	21.57%	19.89%	18.42%

GIGI-NADINE CO.	1/31/07	1/31/06	1/31/05
Profit Margin	6.70%	4.90%	4.00%
Asset Turnover	2.59	2.47	2.18
Return on Assets	17.37%	12.08%	8.72%

LUCKY SIX CO.	1/31/07	1/31/06	1/31/05
Profit Margin	2.90%	2.90%	3.20%
Asset Turnover	2.65	2.49	2.51
Return on Assets	7.68%	7.23%	8.04%

2.	In 2006, JUDY ABBOT CO. generated 21.6 cents in profit for every dollar of assets. In 2006, LUCKY SIX CO. generated 7.7 cents in profit for every dollar of assets. LUCKY SIX CO. is (more / less) efficient at generating profits with its assets than JUDY ABBOT CO.

Which corporation is most efficient at generating profits with its assets?

CADEUJANE CO.

JUDY ABBOT CO.

GIGI-NADINE CO.

LUCKY SIX CO.

Which corporation is least efficient at generating profits with its assets?

CADEUJANE CO.

JUDY ABBOT CO.

GIGI-NADINE CO.

LUCKY SIX CO.

Over the past 3 years which company has shown the most improvement in generating profits with its assets?

CADEUJANE CO.

JUDY ABBOT CO.

GIGI-NADINE

LUCKY SIX CO.

JUDY ABBOT CO. 's return on assets is nearly three times greater than LUCKY SIX CO.'s return on assets. Does this mean thatJUDY ABBOT CO. is a better investment?( Yes / No ) Explain.

No, while JUDY ABBOT CO. has a higher return on assets, this does not mean that JUDY ABBOT CO. is a better investment. While the return that a company earns on its assets is important to shareholders, they are ultimately are concerned with the return on their investment. Return on equity (Net Income/Equity) is an accounting based measures of this return.
In addition, ROA is a measure of current performance, and as an investor you are more concerned about future performance, such as future sales growth, cash flow, and profitability.

Finally, the return on your investment does not depend on the book value of a company's assets, but rather the price you have to for a share of those assets and profits. It may be that because JUDY ABBOT CO.'s relative share price is three times that of LUCKY SIX CO. 's, because it has a higher ROA.

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