If profit is $21,000, after deducting interest of $5,000, and average total assets are $150,000, calculate return on assets to assess profitability from a management viewpoint.
Question
If profit is 5,000, and average total assets are $150,000, calculate return on assets to assess profitability from a management viewpoint.
Solution
To calculate the return on assets (ROA), you need to divide the net income by the total assets and then multiply by 100 to get a percentage.
Step 1: Identify the net income. In this case, the net income is the profit after deducting interest, which is $21,000.
Step 2: Identify the total assets. In this case, the total assets are $150,000.
Step 3: Divide the net income by the total assets. So, 150,000 equals 0.14.
Step 4: Multiply the result by 100 to get a percentage. So, 0.14 times 100 equals 14%.
Therefore, the return on assets is 14%. This means that for every dollar of assets, the company generates 14 cents of profit. This is a measure of how efficiently management is using the company's assets to generate profits.
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