Return on investment (ROI), specifically Return on Assets (ROA), can be decomposed into which of the following two measures?

• A. Earnings per share and price-to-earnings ratio
• B. Net profit margin and asset turnover
• C. Current ratio and debt-to-equity ratio
• D. Gross profit margin and inventory turnover

Answer: (B)

Verified step by step guidance

1. Understand the concept of Return on Assets (ROA): ROA measures how efficiently a company uses its assets to generate profit. It is calculated as Net Income divided by Total Assets.
2. Learn about the decomposition of ROA: ROA can be broken down into two components—Net Profit Margin and Asset Turnover. This decomposition helps analyze profitability and efficiency separately.
3. Define Net Profit Margin: Net Profit Margin is calculated as Net Income divided by Revenue. It indicates how much profit a company generates for every dollar of revenue.
4. Define Asset Turnover: Asset Turnover is calculated as Revenue divided by Total Assets. It measures how efficiently a company uses its assets to generate revenue.
5. Combine the two measures: ROA = Net Profit Margin × Asset Turnover. This formula shows how profitability and efficiency together contribute to the overall return on assets.