Question

A company has annual sales of $160 million, a net profit margin of 4%, and total assets of $90 million. It carries $10 million in accounts receivable, $25 million in inventory, has $55 million in total debt, and 5 million shares of common stock outstanding. Based on this information, the company's return on equity (ROE) is

Answer 1

18.29%

Step-by-step explanation:

Return on Equity is the net profit available for equity/ Total equity value.

Total equity = Total assets - Total debt

= $90 million - $55 million = $35 million

Earnings for equity = Annual sales
`*` net profit margin 4%

= $160 million
`*` 4% = 6.4 million

Therefore, return on equity =
`(Net\ profit\ for\ equity)/(Total\ value\ of\ equity)`

=
`(6.4\ million)/(35\ million) * 100 = 18.2857`

Therefore, ROE = 18.29%