27th Edition
WARREN + 5 others
ISBN: 9781337272094




27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Profit margin, investment turnover, and ROI

 Cash Company has income from operations of $112,500, invested assets of $750,000, and sales of $1,875,000. Use the DuPont formula to compute the return on investment and show (a) the profit margin, (b) the investment turnover, and (c) the return on investment.


To determine

Profit margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.

Formula of profit margin:

Profit margin=Income from operationsSales

Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.

Formula of investment turnover:

Investment turnover=SalesInvested assets

Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies.

Formula of ROI according to Dupont formula:

Return on investment = Profit margin × Investment turnover=Income from operationsSales×SalesInvested assets=Income from operationsInvested assets

To determine: Profit margin of Company C


Determine profit margin of Company C, if income from operations is $112,500, and sales are $1,875,000.

Profit margin=Income from operationsSales


To determine
Investment turnover of Company C


To determine
Return on investment of Company C

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