Question

Following is financial information for three ventures:

VENTURE XX VENTURE YY VENTURE ZZ
After-tax profit margins 5% 25% 15%
Asset turnover 2.0 times 3.0 times 1.0 times

a. Calculate the return on assets (ROA) for each firm.
b. Which venture is indicative of a strong entrepreneurial venture opportunity?
c. Which venture seems to be more of a commodity type business?

Answer 1

a. The ROA:

Venture XX = After tax profit margin * Asset turnover = 5% * 2 = 10%

Venture YY = 25% * 3 = 75%

Venture ZZ = 15% * 1 = 15%

B) The strong entrepreneurial venture opportunity is Venture YY being havibg higher ROA at 75%.

C) The Venture ZZ seems to be more of a commodity-type business because the return on sales and asset turnover is moderate one.