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financial analysis question - blue sun - 09-25-2010
Gross profit 120000
lessoperating expense 80000
non-operating expense 4000 (84000)
net income 36000
1-total assets 250000
2-shareholders equity 150000
compute 1-return to assets and return to equity?
- blue sun - 09-25-2010
please mujhe ye bata dein k jo in mein formula use karein ge us mein net income konsi use karein ge.36000 ya non-operating expense ko ignore karein ge.please mujhe right formula bata dein dein.
1-return to assets=operating net income/average total assets
mere pass ye formula hai aur net income 40000 li gai hai.
2-return to equity=net income/share holder equity
is mein 36000 li gai hai.
please tell me right answer.
- ciapk - 10-04-2010
Dear Blue Sun,
Both formulas are right and used correct type of income, instead of asking correct formula you should ask the reason behind using 40,000 in one formula and 36,000 in the other.
In financial analysis, one can see the information in his/her own perspective based on the decision he / she wants to take on the basis of the available information. The information used for one decision may not be so relevant for another decision. You are confused that why different type of income was taken in two different formula and what was the reason behind?
Let me clarify in detail,
Definitions
Operating Expenses
A category of expenditure that a business incurs as a result of performing its normal business operations.
Non Operating Expense
An expense incurred by activities not relating to the core operations of the business. Accountants may remove non-operating expenses or revenues in order to examine the performance of the business, ignoring effects of financing or irrelevant issues.
So, normally, Return on Assets Employed is the ratio the management of the company is more concerned about this, they always wish to know that what is the actual earning of the company on the assets employed by them so they only take operating expenses and revenues for such ratio and ignore non operating.
While Return on Equity is the ratio to which an investor is more concerned, so for decision making, investor seeks for total earning of the company to the equity, regardless of nature being operating income or not.
Therefor, different type of income was taken in above formulas because one ratio is meant for management's prospective and other is for investor's prospective.
Hope you understand.
- blue sun - 10-06-2010
thanks
- wmahmooood - 10-26-2010
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