NPM, ROA, ATO

Question 1

ROA (Return on Assets)

Answer 1

• measures how effectively a business has used its assets to earn a profit
• formula:
  (net profit/avg. total assets) x 100
• an improvement is a higher ROA

Question 2

Causes of change to ROA

Answer 2

• net profit may increase is the business has increased its ability to earn revenue (effective advertising etc.) or control expenses (cheaper suppliers etc.) or vice versa if revenue decreases and expenses increase
• a decrease in avg. total assets may indicate the selling off of idle assets which will increase ROA

Question 3

Strategies to improve ROA

Answer 3

• review distribution channels
• more effective advertising
• maintain expense control
• reduce expenses
• sell off idle assets
• either reduce ATA or increase profit

Question 4

ATO (Asset Turnover)

Answer 4

• how productively a business uses its assets to generate sales revenue
• formula:
  net sales/avg. total assets
• an improvement is a faster ATO

Question 5

Causes of change to ATO

Answer 5

• increasing = increase in sales faster than increase in assets/decrease in assets while sales remain steady
• worsening = increase in value of assets faster than sales/decrease in sales quicker than assets

Question 6

Strategies to improve ATO

Answer 6

• increase sales through effective advertising leads to more out of the asset
• increase customer service
• get rid of idle assets leads to an decrease in assets but steady sales

Question 7

NPM (Net Profit Margin)

Answer 7

• measures the percentage of sales that a business gets to keep as profit
• formula:
  (net profit/net sales) x 100
• an improvement is indicated by a higher NPM

Question 8

Causes of change to NPM

Answer 8

• higher = better expense control leads to sales increasing faster than expenses
• lower = less sales or more expenses

Question 9

Strategies to improve NPM

Answer 9

• increase effective advertising
• change suppliers to obtain cheaper supplies
• buy in bulk to achieve economies of scale and lower prices