Question

S&J Plumbing, Incorporated's income statement shows a net profit before tax of $468 and net sales of $7,482 for 2010. Total assets are at $3,244. The balance sheet lists the company’s equity for fiscal year ending 2010 as $1,746.

Calculate the following ratios for this company:

• Return on sales ratio (net profit margin)
• Return on assets (ROA)
• Return on equity (ROE)

What make S&J Plumbing, Inc efficient?

Answer 1

Return on sales or Net profit margin = Net profit after tax / Net sales * 100

putting the given values in the above formula, we get,

Return on sales or Net profit margin = $468 / $7482 * 100

Return on sales or Net profit margin = 6.25%

Return on assets (ROA) = Net profit after tax / Total assets * 100

putting the given values in the above formula, we get,

Return on assets (ROA) = $468 / $3244 * 100

Return on assets (ROA) = 14.43%

Return on equity (ROE) = Net profit after tax / Total equity * 100

putting the given values in the above formula, we get,

Return on equity (ROE) = $468 / $1746 * 100

Return on equity (ROE) = 26.80%

S&J Plumbing is efficient. Its net profit margin is 6.25%. Its returnn on assets is even more, i.e. 14.43% indicating that it enjoys more return of income per unit of assets or dollars invested. Its return on equity is also high at 26.80%, indicating the return or income earned by per unit of dollars invested by equity shareholders.