Question

Company A has an Asset turnover ratio of .531, return on asset ratio of .127, and return on equity of .165. What does that tell me about company A?

Company B has an Asset turnover ratio of 1.553, return on asset ratio of .012, and return on equity of .07. What does that tell me about company B?

Compare Company A to Company B.

The industry average has an Asset turnover ratio of .81, return on asset ratio of .113, and return on equity of .2903. How does Company A compare to the industry average?

What can Company A do to improve its returns both on assets and on equity?

Is Company A deficient in its ability to generate profits from its assets and from its equity investment?

Answer 1

Solution

Company’s A Asset turnover is less than Company B. As the company’s asset turnover is less than Company B it indicates that the company is not frequently turning over its assets which is not considered as a good sign of operating efficiency. Although Company’s A return on assets and equity is greater than company B it indicates that the company A’s net income is higher than company B due to controlling of operating expenses which help Company A in attaining higher ratio of return on assets and return on equity than Company B.

The ratios of Company A Company are quite less than industry.

Company A can improve its both return on assets and equity by

1. Increasing revenues
2. Reducing Operating expenses
3. Reducing asset maintenance costs
4. By Improving Asset turnover
5. By paying less Taxes
6. By increasing financial leverage.

No, a company A is not deficient in generating profits from assets and equity because Company A has higher return on equity and assets as compared to Company B although it is less than Industry. It can improve both these ratios b adopting the above suggested methods.