Company A has an Asset turnover ratio of .531, return on asset ratio of .127, an

Question

Company A has an Asset turnover ratio of .531, return on asset ratio of .127, and return on equity of .165. What does that tell me about company A?

Company B has an Asset turnover ratio of 1.553, return on asset ratio of .012, and return on equity of .07. What does that tell me about company B?

Compare Company A to Company B.

The industry average has an Asset turnover ratio of .81, return on asset ratio of .113, and return on equity of .2903. How does Company A compare to the industry average?

What can Company A do to improve its returns both on assets and on equity?

Is Company A deficient in its ability to generate profits from its assets and from its equity investment?

Explanation / Answer

Solution

Company’s A Asset turnover is less than Company B. As the company’s asset turnover is less than Company B it indicates that the company is not frequently turning over its assets which is not considered as a good sign of operating efficiency. Although Company’s A return on assets and equity is greater than company B it indicates that the company A’s net income is higher than company B due to controlling of operating expenses which help Company A in attaining higher ratio of return on assets and return on equity than Company B.

The ratios of Company A Company are quite less than industry.

Company A can improve its both return on assets and equity by

No, a company A is not deficient in generating profits from assets and equity because Company A has higher return on equity and assets as compared to Company B although it is less than Industry. It can improve both these ratios b adopting the above suggested methods.

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