Tundra Services Company, a division of a major oil company, provides various services to the...
Question:
Tundra Services Company, a division of a major oil company, provides various services to the operators of the North Slope oil field in Alaska. Data concerning the most recent year appear below:
- Sales: $17,700,000
- Net operating income: $4,600,000
- Average operating assets: $35,600,000
Required:
A) Compute the margin for Tundra Services Company. (Round your answer to 2 decimal places.)
B) Compute the turnover for Tundra Services Company. (Round your answer to 2 decimal places.)
C) Compute the return in investment (ROI) for Tundra Services Company. (Round your intermediate calculations and final answer to 2 decimal places.)
Ratio Analysis:
Investors use ratio analysis in order to measure performance across areas such as asset and debt management, profitability, liquidity, and market value. Ratios are evaluated using benchmarking and trend analysis to evaluate the effectiveness and efficiency of a company in comparison to its competitors.
Answer and Explanation: 1
A) Compute the margin
Margin demonstrates the portion of gross profit generated from each sale. This ratio is calculated by dividing gross profit by net sales. Take a look at the equation:
- Margin = (Gross Profit) / Net Sales
In this problem we are given gross profit in the form of net operating income. Net operating income amounted to $4,600,000, and sales were recorded at $17,700,000.
- Margin = $4,600,000 / $17,700,000
- Margin = 0.26
B) Compute the turnover
Turnover, which measures the amount of sales which are generated from invested assets, is calculated by dividing revenue by invested assets. In our problem, we'll calculate turnover using this formula:
- Turnover = Net Sales / Average Operating Assets
- Turnover = $17,700,000 / $35,600,000
- Turnover = 0.50
C) Compute the return in investment (ROI)
The ROI ratio measures the net income generated from an investment in relation to its cost. Since we are told of no additional expenses other than those used to produce net operating income, the formula we'll use is as follows:
- ROI = Net Operating Income / Average Operating Assets
- ROI = $4,600,000 / $35,600,000
- ROI = 0.13
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Financial ratios are used to calculate the relationship between variables, such as a company's financial health and performance. Discover and calculate commonly used financial ratios, including current ratio, debt ratio, and gross margin.
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