04-12-2007, 07:27 PM
Q4The net profit percentage in a company is 12% and the asset turnover ratio is 2.what is the return on capital employed?
SUGGESTED ANSWER
Net profit ratio = Net profit / Total sales
Asset Turnover ratio = Total sales / Total assets
Now,
Return on capital employed = Net profit ratio x Asset turnover ratio
= 12% x 2
= 24%
Return on capital employed is 24 %.
Note
It is not told in question that whether the profit was before or after interest. Further, it was also not mentioned that whether the asset turnover ratio was calculated on NET ASSETS or TOTAL ASSETS.
Assumption
I assumed that if asset turnover ratio is based upon total assets then the profit taken for net profit ratio was also before all interest charges.
Regards,
Kamran.
SUGGESTED ANSWER
Net profit ratio = Net profit / Total sales
Asset Turnover ratio = Total sales / Total assets
Now,
Return on capital employed = Net profit ratio x Asset turnover ratio
= 12% x 2
= 24%
Return on capital employed is 24 %.
Note
It is not told in question that whether the profit was before or after interest. Further, it was also not mentioned that whether the asset turnover ratio was calculated on NET ASSETS or TOTAL ASSETS.
Assumption
I assumed that if asset turnover ratio is based upon total assets then the profit taken for net profit ratio was also before all interest charges.
Regards,
Kamran.
