Question

Return on assets =

 Explain what does this measure

 Formula

 Give an example of the calculation

Asset turnover =

 Explain what does this measure

 Formula

 Give an example of the calculation

Payout ratio =

 Explain what does this measure

 Formula

 Give an example of the calculation

Return on common stockholders’ equity

 Explain what does this measure

 Formula

 Give an example of the calculation

Answer 1

Return on assets represents the percentage of profit or revenue generated by the assets of the company.

It tells how much revenue a company makes or is able to make from its total assets. In general terms it determines the capacity of the company by its assets.

Formula -   Net Income    Average Total Assets Example -  Consider a company which has net income $78950. The start of period assets are $705850 and the end of period assets are $621005.

Now we need to calculate the return on assets.

Average assets = ($705850 + $621005) / 2 = $663427. 5

Return on assets =( $78950 / $663427.5 ) ×100

= 11.9 %

Asset turnover is the ratio which is used to measure the efficiency of the assets of a company for generating sales revenue or income.

Formula =    Net Sales Revenue   Average Total Assets Example- Suppose a company has net sales revenue $200000 and total assets in the current year is $50000 and total assets last year is $60000.

Now for calculating the assets turnover we will calculate average total assets =

($50000 + $60000) / 2 = $55000.

Asset turnover = ($200000) / $55000 = 3.63

Payout ratio is the ratio of dividends paid by the company to its shareholders. It decides the fraction from the income of the company which is given to the shareholders.

Formula =   Dividends    Net Income

Example - Suppose a company earned $2 per share and paid dividends to its shareholders as $0.9 per share. Then we can calculate the payout ratio as follows :

Payout ratio = $0.9 / $2 = 0.45 = 45%

Return on common stockholders' equity is the income that has been generated by the company for the benefits of all common stockholders.

Formula =   Net Income - Preffered Dividend    Average common stock holders equity

Example - A company has net income is $520000 and has distributed dividend to shareholders of $130000. Firms common equity in year beginning was $3120000 and at the end of year is $4005000.

The return on common stockholders equity is =

($520000 - $130000) / ($3120000 + $4005000) ÷2

=$390000/ $3562500 = 10.9 %