Should a company's asset turnover and profit margin stand at 1.85 and 0.35 respectively, its return on investment will be.
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Answer: A. 0.65
Explanation
Return on investment equals profit margin multiplied by asset turnover. Multiplying 0.35 profit margin by 1.85 asset turnover equals 0.6475. Rounding 0.6475 to two decimal places gives the final result of 0.65. The DuPont analysis framework breaks down return on investment into component ratios. Asset turnover measures how efficiently a company uses assets to generate sales. Profit margin indicates how much profit is extracted from each dollar of sales.
Corporate executives use this metric to evaluate overall operational profitability. Improving either asset turnover or profit margin boosts total return on investment. Financial analysts benchmark these ratios against competitors within the industry. Option B is incorrect because 0.35 represents only the profit margin ratio. Option C is wrong since 1.50 does not result from the required multiplication. Option D is incorrect because 5.29 represents an incorrect arithmetic calculation.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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