Question Bank - Accountancy

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When operating profit ratio is 25% and capital turnover ratio is 2% what is the ROI?

A.
75%
B.
50%
C.
25%
D.
none of the above

Solution:

Return on Investment: Return on investment is a ratio between net profit and cost of investment. A high ROI means the investment's gains compare favorably to its cost. As a performance measure, ROI is used to evaluate the efficiency of an investment or to compare the efficiencies of several different investments. Operating Profit Margin is a profitability or performance ratio that reflects the percentage of profit a company produces from its operations, prior to subtracting taxes and interest charges. It is calculated by dividing the operating profit by total revenue. Capital Turnover Ratio: Turnover is the investment turnover ratio of the company. To calculate this number, take the firms sales figure and divide it by the companys invested capital. This is a measure of how effective a company is at generating sales from the assets that have been invested in it. Methods to find Return on Investment:ROI = Net Income / Cost of InvestmentROI = Investment Gain / Investment BaseROI = Operating Profit Ratio*Capital Turnover Ratio Return on Investment = Operating Profit Ratio*Capital Turnover Ratio = 25% × 2% = 50%Therefore, When the operating profit ratio is 25% and the capital turnover ratio is 2% the ROI is 50%.

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