A retailer's return on net worth equals asset turnover times profit margin times (financial leverage).

Question

Quizplus · Accepted Answer

The given statement is true. The formula for Return on Net Worth (RONW) is: RONW = Net Profit / Net Worth.

The Net Profit can be broken down into three components:

1) Asset Turnover: This represents the efficiency of the company in generating revenue from its assets. It is calculated as Revenue / Total Assets.

2) Profit Margin: This measures the profitability of the company, i.e., the percentage of revenue that the company retains as profit after deducting its expenses. It is calculated as Net Profit / Revenue.

3) Financial Leverage: This represents the degree to which the company uses debt financing to supplement its equity financing. It is calculated as Total Assets / Net Worth.

Therefore, the formula for RONW can be written as:

RONW = (Revenue / Total Assets) x (Net Profit / Revenue) x (Total Assets / Net Worth)

Simplifying the above equation gives:

RONW = Asset Turnover x Profit Margin x (Financial Leverage)

A Retailer's Return on Net Worth Equals Asset Turnover Times