Question
A company's financial statements show a profit margin of
15% and a return on equity (ROE) of 20%. What is the company's asset turnover ratio assuming financial leverage of 2?Solution
The asset turnover ratio is calculated as revenue divided by total assets. Using the formula for ROE, we can solve for the asset turnover ratio: ROE = Profit margin x Asset turnover ratio x Leverage 20% = 15% x Asset turnover ratio x (Total assets / Shareholder equity) Asset turnover ratio = 20% / (15% x (Total assets / Shareholder equity)) Asset turnover ratio = 20% / (15% x 2) Asset turnover ratio = 0.67
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