LLL Company reported the following items on its 2019 financial statements:
a. Determine LLL's rate of return on total assets for 2019. Round final answer to two decimal places. Label your work and show computations.
b. What does the rate of return on total assets mean? Discuss your findings for LLL.
a.
Rate of return on total assets = (Net income + Interest expense)/Average total assets
= ($4,000 + $1,200)/[($60,000 + $64,000)/2]
= $5,200 /$62,000
= 8.39%
b.
The rate of return on total assets means that for each $1.00 invested in the company's average total assets, the company earned $0.0839. This can be compared to prior periods, an industry average, or a goal set by LLL. This can also be compared to the cost of borrowing. In general, 8.39% is a strong return.
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