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CS Executive · Corporate Accounting and Financial Management · Financial Statement Analysis

A firm has net profit margin of 8% on sales and total asset turnover of 2.5 times. What is its return on total assets?

Return on total assets is 20%. It equals the net profit margin multiplied by total asset turnover, so 8% times 2.5 gives 20%. Dividing the two instead would wrongly give 3.2%.

  1. A20%Correct
  2. B10.5%
  3. C3.2%
  4. D32%

Explanation

Return on assets = Net profit margin × Asset turnover = 8% × 2.5 = 20%. Dividing 8% by 2.5 gives 3.2%, which is the wrong operation.

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