Question

Profit Margin and Debt Ratio

Assume you are given the following relationships for the Haslam Corporation:

Sales/total assets	1.8
Return on assets (ROA)	3%
Return on equity (ROE)	5%

Calculate Haslam's profit margin and liabilities-to-assets ratio. Do not round intermediate calculations. Round your answers to two decimal places.

Profit margin:   %

Liabilities-to-assets ratio:   %

Suppose half of its liabilities are in the form of debt. Calculate the debt-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places.

  %

Answer 1

Given that,

Sales/total assets= 1.8

Return on assets (ROA)= 3%. So, Net Income/Total assets= 3%

Return on equity (ROE)= 5%. So, Net Income/Equity= 5%.

Profit Margin:

Profit Margin is calculated as Net Income/Sales.

It can be calculated by Dividing ROA with Sales/total assets.

ROA/(Sales/total assets)= 3%/1.8

(Net Income/Total assets)/(Sales/Total assets)= 3%/1.8

Net Income/Sales= 3%/1.8

Net Income/Sales= 1.67%.

So, Profit Margin is 1.67%.

liabilities-to-assets ratio:

On dividing ROA by ROE, we get,

ROA/ROE= 3%/5%.

(Net Income/total assets)/(Net Income/Equity)= 0.6

Equity/Total assets= 0.6.

Equity can also be written as (Total assets-Liabilities).

(Total assets-Liabilities)/Total assets= 0.6

1-(Liabilities/Total assets)= 0.6.

Liabilities/Total assets= 0.4.

So, Liabilities-to-assets ratio= 40.00%.

Debt-to-Assets Ratio:

Given that half of its its liabilities are in the form of debt.

So, Liabilities/Assets can be written as (2*debt)/Assets.

So, (2*debt)/Assets= 0.4

debt/Assets= 0.2.

So, debt-to-assets ratio= 20.00%.