company A Industry

Return on Sales 2% 10%
Return on assets 18% 12%


Explain why the return on assets is more ratio is more favorable the return on sale ratio compare to the industry.

How to calculate

Return on Sales, and Return on Assets, are, respectively...

ROS = \frac{\text{Net Income}}{\text{Sales}}

ROA = \frac{\text{Net Income}}{\text{Sales}} .

Looking at those two ratios, think about what situations might cause a company's ROA to be significantly higher than its ROS. Give that some thought, and post back if you're stuck.

ROA should be Net Income / Equity am i right

so seems to me that if you can get more money per assets dollar you are in a good situation

Wow, I booted that one, didn't I? (That's what happens when I try to type and watch the football game at the same time :o) Very sorry, Alterescu. ROA is

\frac{\text{Net Income}}{\text{Total Assets}} .

There...much better.

Now on to the subject of the question. Your thinking is on track--ROA is an indication of how many dollars of net profit you're generating per dollar of assets employed. All other things constant, increasing your ROA is certainly a positive move.

But I think the question is asking for some possible reasons why a company's ROA might be favorable vis-a-vis its industry average, while its ROS is significantly lagging its peers.

For example, here's one possibility: A company that's significantly less capital-intensive (fewer long-term assets), but more labor-intensive (higher current expenses in its cost structure) than the industry average might exhibit such ROA and ROS stats as those in your problem.

Or for a different twist: Company A's assets might predominantly be a lot of antiquated, fully depreciated plant and equipment (badly in need of upgrades and replacements). The fact that they're fully depreciated would tend to push the company's ROA metric northward (and also an illustration of why you gotta look under ROA's hood and see what's driving the numbers, and not just take it at face value).

Just a couple of thoughts you can run with. Good luck with your project!

thanks
And yes it's not easy doing at the time, as a man i know

Hate to tell you this, but not all men watch football, so no they don't all know.

I'm female and I used to try to do homework while watching football too! So there! (Actually, that was the year I stopped watching and lost track of everything cause I just didn't have that kind of time to spare.)