Assume you are given the following relationships for Zumwalt Corporation: Sales/total assets 1.5X Return on assets (ROA) 3.0% Return on equity (ROE) 5.0%... Calculate Zumwalt's net profit margin and debt ratio.

Answer:

ROA = 3.0%
ROE = 5.0%
Sales / Total assets = Total asset turnover ratio = 1.5 times
From DU-Pont equation,
ROA = Profit margin x Total asset turnover ratio
Profit margin = ROA / Total asset turnover ratio
= 3.0% / 1.5
= 0.03 / 1.5
= 0.02 or 2%

We are given ROA and ROE. If we use the reciprocal of ROE, we have the following equation:
Reciprocal of ROE is

(Equity / Assets) = (Net income / Assets) x (Equity / Net income)
= 3.0% x (1 / 0.05)
= 60%

(Debt / Assets) = 1 - (Equity / Assets)
= 1 - 60%
= 1 - 0.60
= 0.40 or 40%

(Debt / Assets) is nothing but the Debt ratio.

Therefore, the debt ratio is 40%