Profitability Ratios PJ's Ice Cream Parlor has asked you to help piece together financial information on the firm for the most current year. Managers give you the following information: sales = $50 million, total debt = $20 million, debt ratio = 50%, and ROE = 12%. Using this information, what is PJ's ROA?
A) 4%
B) 6%
C) 10%
D) 12%

Question

Quizplus · Accepted Answer

ROE = (Net Income/Equity) * 100 
12% = (Net Income/0.5Equity) * 100 
Net Income = (12/100) * 0.5 * Equity 
Net Income = 0.06 * Equity 
ROA = Net Income/Total Assets 
ROA = (0.06 * Equity) / (Equity + 20) 
ROA = 0.06 / 1.2 = 0.05 = 5% 
Therefore, the PJ's ROA is 6%.

Profitability Ratios PJ's Ice Cream Parlor Has Asked You to Help