Kl Fashio

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2. How well has management employed the company's assets? - The Return on Assets (ROA) [Net Income ÷ Average Total Assets] measures the profitability of the firm on all invested dollars. That is, it measures how well the firm’s assets have been employed in generating income. This measure is somewhat broader than the return on equity because it compares the returns on total capital. This includes the capital that you and the creditors have provided.

What constitutes a satisfactory ROA? It depends on the type of assets and their end use. Once again, since companies within a given industry tend to employ similar assets, your ROA should be measured against industry norms.

K-L Fashions’ ROA for fiscal 2005 was 8.4 percent [$147,430 ÷ $1,761,660] compared with a median of 10 percent for the industry for the most recent period. Again, K-L Fashions falls short. We also see a declining ROA over a three year period: 25 percent for 2003, 18.3 percent for 2004, and 8.4 percent for 2005.

Managers

Managers, too, are interested in measuring the operating performance in terms of profitability and return on invested capital. If they are not owners, managers must still satisfy the owners’ expectations in this regard. As managers, they are interested in measures of operating efficiency, asset turnover, and liquidity or solvency. These will help them manage day-to-day activities and evaluate potential credit customers and key suppliers. Manager ratios serve as cash management tools by focusing on the management of inventory, receivables and payables. Accordingly, these ratios tend to focus on operating data reflected on the profit and loss statement and on the current sections of the balance sheet.

3. Are profits high enough, given the level of sales? - In other words, how efficiently is management conducting operations? The Net Profit Margin [Net Income ÷ Sales (or Return on Sales) is a measure of the relative efficiency of the...