Question

Sheridan Company and Concord Company both manufacture school science equipment. The following financial information is for three years ended December 31 (in thousands):

Sheridan Company	2021	2020	2019
Net sales	$557.0	$524.6	$472.0
Profit	21.7	20.7	19.2
Total assets	698.7	670.7	600.7

Concord Company	2021	2020	2019
Net sales	$1,750.7	$1,586.7	$1,472.8
Profit	96.7	85.7	78.7
Total assets	1,528.7	1,418.7	1,323.7

(a)

Calculate the asset turnover and return on assets ratios for both companies for 2020 and 2021. (Round answers to 2 decimal places, e.g. 52.75.)

		Sheridan Company		Concord Company
Asset turnover 2021		: 1		: 1
Asset turnover 2020		: 1		: 1
Return on assets 2021		%		%
Return on assets 2020		%		%

Answer 1

Asset turnover ratio

The Asset turnover ratio is an efficiency ratio that measures a company's ability to generate sales from its assets by comparing net sales with averarage total assets. In other words, this ratio shows how efficiency a company can use its assets to generate sales

Asset Turnover Ratio = Net Sales / Average Total Assets

Where,

Net sales is equal to sales in the year

Average assets is equal to beginning assets plus ending assets divided by 2

Year 2020

Sheridan Company:

Net Sales = $ 524,600

Beginning Assets = $ 600,700

Ending Assets = $ 670,700

Average Total Assets = (600,700 + 670,700) / 2

= 635,700

Assets Turnover Ratio = 524.600/ 635700

= 0.83 (approx)

Concord Company:

Net Sales = $ 1,586,700

Beginning Assets = $ 1,323,700

Ending Assets = $ 1,418,700

Average Total Assets = (1,323,700 + 1,418,700) / 2

= 1,371,200

Assets Turnover Ratio = 1,586,700/ 1,371,200

= 1.16 (approx)

Year 2021

Sheridan Company:

Net Sales = $ 557,000

Beginning Assets = $ 670,700

Ending Assets = $ 698,700

Average Total Assets = (670,700 + 698,700) / 2

= 684,700

Assets Turnover Ratio = 557,000/ 684,700

= 0.81 (approx)

Concord Company:

Net Sales = $ 1,750,700

Beginning Assets = $ 1,418,700

Ending Assets = $ 1,528,700

Average Total Assets = (1,418,700 + 1,528,700) / 2

= 1,473,700

Assets Turnover Ratio = 1,750,700/ 1,473,700

= 1.19 (approx)

Return on Assets Ratio

Return on Assets is a type of return on Investment metric that measures the profitability of a business in relation to its total assets. This ratio indicates how well a company is performing by comparing the profit (net income) it's generating to the capital it's invested in assets.The higher the return, the more productive and efficient management is in utilizing economic resources.

Return On Asset = Net income / Average Assets * 100

Where:

Net income is equal to net earning i.e. profit in the year

Average assets is equal to beginning assets plus ending assets divided by 2

Year 2020

Sheridan Company:

Net Income (Profit) = $ 20,700

Beginning Assets = $ 600,700

Ending Assets = $ 670,700

Average Total Assets = (600,700 + 670,700) / 2

= 635,700

Return On Assets Ratio = 20,700/ 635700 *100

= 3.26 % (approx)

Concord Company:

Net Income (Profit)  = $ 85,700

Beginning Assets = $ 1,323,700

Ending Assets = $ 1,418,700

Average Total Assets = (1,323,700 + 1,418,700) / 2

= 1,371,200

Return On Assets Ratio = 85,,700/ 1,371,200 * 100

= 6.25 % (approx)

Year 2021

Sheridan Company:

Net Income (Profit)  = $ 21,700

Beginning Assets = $ 670,700

Ending Assets = $ 698,700

Average Total Assets = (670,700 + 698,700) / 2

= 684,700

Return On Assets Ratio = 21,700/ 684,700 * 100

= 3.17 % (approx)

Concord Company:

Net Income (Profit)  = $ 96,700

Beginning Assets = $ 1,418,700

Ending Assets = $ 1,528,700

Average Total Assets = (1,418,700 + 1,528,700) / 2

= 1,473,700

Return On Assets Ratio = 96,700/ 1,473,700 * 100

= 6.56 % (approx)

Sheridan Company Concord Company

Assets Turnover (2020) (1) 0.83 1.16

Assets Turnover (2021) (1) 0.81 1.19

Return On Assets (2020) (%) 3.26    6.25

Return On Assets (2021) (%) 3.17 6.56