(Understanding return on assets, LO 2) You are provided with the following information about Unwin Corp. (Unwin), a small manufacturing company.

Required:

a. Calculate Unwin’s return on assets by determining its profit margin and asset turnover ratio. Assume that profit margin equals net income divided by sales.

b. Calculate Unwin’s return on equity by using its return on assets and its financial leverage.

c. Explain why is it not possible for an entity’s return on assets to be greater than its return on equity.

d. Assess the profitability of Unwin. In your response, explain the reasons for any changes in Unwin’s profitability.

Transcribed Image Text:

2006 2005 2004 2003 2002 Sales Net income Total liabilities $654,720 $611,888 $582,750 $525,000 28,153 25,699 22,145 18,375 (at year end) 173,137 163,337 147,150 136,250 125,000 Shareholders' equity (at year end) 190,840 162,688 136,988 114,844 96,469