Using the selected information given below for Luk Company, calculate the return on assets, debt ratio, and profit margin. Comment on the results of operations and the financial position of the company for the year.Sales1,050,000Expenses795,000Assets (beginning of the year)1,500,000Assets (end of the year)1,900,000Liabilities850,000
What will be an ideal response?
Return on assets = ($1,050,000 ? $795,000)/(($1,900,000 + $1,500,000)/2) = 15.0%
Debt ratio = $850,000/1,900,000 = 44.7%
Profit margin = $255,000*/1,050,000 = 24.3%
* Net income = $1,050,000 ? $795,000 = $255,000
The company is performing well. Profit margin and debt ratio are at acceptable levels. Return on assets may be low. This would depend on the type of business and expectations of management. The increase in assets during the year could have resulted in the lowering of return on assets. This would need to be compared to prior years and to industry standards, and should be monitored in subsequent years.
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