Question
The Asset turnover is 5 times and Net margin is 3% for
PQR Ltd. What is the Return on Investment for PQR Ltd?Solution
Here, Return on Investment (ROI) can be calculated using the DuPont formula. It uses the net profit margin and total asset turnover in the calculation of ROI. ROI = Net profit/total investment (or total assets) Since Asset turnover = Sales/Total asset and net profit margin = Net profit/sales), net profit/total asset, by multiplying Asset turnover and Net profit Margin , one can arrive at the ROI. As such, ROI = 5*3% = 15%.
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