The return on assets ratio usually is computed as:
A) Sales divided by average total assets.
B) Gross profit divided by average total assets.
C) Operating profit divided by average total assets.
D) Profit divided by average total assets.

Question

Quizplus · Accepted Answer

The return on assets ratio measures how efficiently a company is using its assets to generate profits. Operating profit (also known as earnings before interest and taxes, or EBIT) is used in the calculation because it excludes the effects of financing decisions such as interest expense. Dividing operating profit by average total assets gives a percentage that represents the company's return on the assets it has invested in. Option A is incorrect because it uses sales in the numerator, which does not provide information on profitability. Option B is incorrect because it uses gross profit, which does not account for operating expenses. Option D is incorrect because it is too general and does not specify the type of profit being used.

The Return on Assets Ratio Usually Is Computed As