Question

Two entreprenuers borrowed $50,000 at 10% interest from members of families and each put up $30,000 in equity capital. Retail space was rented and $60,000 was spent for fixtures and store equipment. For their venture after one complete. year of operation, they asked you to do a financial ratio analysis. Here are the data you collected until today. Calculate the operating return on assets.

Sales: $320,000. Operating Costs: 285,000. Depreciation: 10,000. Interest: 5,000 Taxes: 6,000. Cash: $20,000. Receivables: 30,000. Inventories: 50,000. Net Fixed Assets: 50,000. Payables: 22,000. Accruals: 18,000. Long-Term Loan: 50,000. Common Equity; 60,000

Answer 1

Calculating the Operating Profit(EBIT) :-

Particular	Amount in $
Sales	320,000.00
Less: Operating Costs	(285,000.00)
Less: Depreciation	(10,000.00)
Operating Profit(EBIT)	25,000.00

- Total Assets = Cash + Receivables + Inventory + Net Fixed Assets

Total Assets = $20,000 + $30,000 + $50,000 + $50,000

Total Assets = $150,000

- Operating return on Assets = EBIT/Total Assets

Operating return on Assets = $25,000/$150,000

Operating return on Assets = 16.67%

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