Nike had income of $350 million and average invested assets of $2,000 million. Its ROA is:
a. 1.8%.
b. 35%.
c. 17.5%.
d. 5.7%.
e. 3.5%.
The correct answer and explanation is :
To calculate the Return on Assets (ROA), we use the following formula:
[
\text{ROA} = \frac{\text{Net Income}}{\text{Average Invested Assets}} \times 100
]
Where:
- Net Income = $350 million
- Average Invested Assets = $2,000 million
Now, let’s plug the values into the formula:
[
\text{ROA} = \frac{350}{2000} \times 100 = 0.175 \times 100 = 17.5\%
]
So, the ROA is 17.5%.
Explanation:
The Return on Assets (ROA) is a financial metric that measures how efficiently a company is using its assets to generate profit. ROA is calculated by dividing the net income by the average invested assets (or total assets) and then multiplying by 100 to express it as a percentage.
In this case, Nike’s net income is $350 million, which represents the company’s profit after expenses. The average invested assets (also referred to as total assets) represent the resources the company has at its disposal to generate this profit, which, in this case, amounts to $2,000 million.
By dividing net income ($350 million) by invested assets ($2,000 million), we determine the percentage of profit generated per dollar of invested assets. A higher ROA indicates better asset utilization, meaning Nike is generating a higher return relative to the assets it owns or controls.
The answer is 17.5%, meaning that for every dollar invested in assets, Nike generates 17.5 cents of profit. This is a solid performance, suggesting efficient use of its resources.
Thus, the correct answer is c. 17.5%.