1. Compare and contrast a return on assets analysis versus a return on sales> which companies will benefit most from the former and why?
ROA (short for return on assets) is a measure of a company’s profitability relative to total assets invested in the business by the owners.
ROA = Net Income/Assets
ROS (short for return on sales) on the other hand is a measure of a company’s overall operating efficiency.
ROS =Net Income/Revenue
Both ROA and ROS indicate the level of efficiency of the management. ROA indicates the efficiency of the management in making use of assets to create earnings, whereas, ROS indicates the efficiency of the management in using the sales dollar. In other words, ROS indicates the company’s efficiency in managing costs, overhead, and operations.
For public companies, ROA varies substantially and depends to a large extent on the type of industry. As a comparative measure, ROA for public companies is best applied by comparing it with the company’s previous ROA or with a similar company’s ROA. Since debt and equity financing are utilized to provide for the operations of such companies, ROA gives an indication to investors as to how effectively the invested money is being converted into net income. A high ROA indicates to investors that the company is successful in earning more money with less investment.
2. When is it a good idea to ignore the axiom that short-term needs should be financed with short-term instruments?
The matching principle says that short-term needs must be financed through short-term instruments and long-term needs with long-term instruments. Financing short-term needs through long-term instruments is similar to implementing a conservative policy. In situations where little risk is preferred and a potential for huge returns is involved, but a high short-term seasonal working capital is needed, it may be a good idea to...
Please join StudyMode to read the full document