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 Nike’s Return on Assets (ROA), we use the following formula: ROA=Net IncomeAverage Invested Assets×100ROA = \frac{\text{Net Income}}{\text{Average Invested Assets}} \times 100
Where:
- Net Income is $350 million
- Average Invested Assets are $2,000 million
Now, plug the values into the formula: ROA=3502000×100=0.175×100=17.5%ROA = \frac{350}{2000} \times 100 = 0.175 \times 100 = 17.5\%
Thus, the correct answer is c. 17.5%.
Explanation:
Return on Assets (ROA) is a financial ratio that measures a company’s ability to generate profit from its assets. It shows how efficiently a company uses its assets to produce income. The higher the ROA, the more efficient the company is in utilizing its assets.
In this case, Nike has a net income of $350 million and invested assets of $2,000 million. The ROA formula helps investors and analysts understand how well Nike is leveraging its invested assets to generate profits. The result, 17.5%, indicates that for every dollar invested in assets, Nike earns 17.5 cents in profit.
This ratio is especially important for comparing the financial performance of companies within the same industry. A higher ROA usually signals better management and operational efficiency. Nike’s 17.5% ROA suggests a relatively strong return on the assets it has invested in, meaning the company is performing well in terms of profitability in relation to its asset base.
In contrast, if Nike’s ROA were low, it might signal inefficiency, suggesting that the company isn’t making the most of its assets to generate income. Therefore, understanding ROA is key in evaluating a company’s financial health and its asset utilization efficiency.