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ACCA Applied Knowledge · Financial Accounting · Analysis of financial statements

Two companies in the same sector have these results. Company X: asset turnover 2.0, net profit margin 4%. Company Y: asset turnover 0.8, net profit margin 10%. Which conclusion is correct?

X and Y earn equal returns on total assets. Return equals net margin multiplied by asset turnover: X gives 4% times 2.0, which is 8%, and Y gives 10% times 0.8, which is also 8%. They achieve it by different strategies.

  1. AY has a higher return on total assets than X
  2. BX has a higher return on total assets than YCorrect
  3. CX and Y have equal returns on total assets
  4. DX is certainly more efficient and more profitable than Y

Explanation

Return on assets = margin x asset turnover. X: 4% x 2.0 = 8%. Y: 10% x 0.8 = 8%. These are equal, so option C is correct and the stated key must be recomputed.

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