The decomposition of return on assets illustrates why some companies with low profit margins can be very profitable if their asset turnover is high.

Question

Quizplus · Accepted Answer

Return on assets (ROA) is calculated by dividing net income by total assets. It can be decomposed into two components: profit margin and asset turnover. Profit margin is the percentage of sales that results in net income, while asset turnover is the amount of sales generated per dollar of assets. A company with a low profit margin can still be profitable if its asset turnover is high, meaning it is able to generate a large amount of sales with relatively few assets. Therefore, the statement is true.

The Decomposition of Return on Assets Illustrates Why Some Companies