Grady Home Health has a profit margin of 15 percent on sales of $20 million. If the firm has debt of $7.5 million and total assets of $22.5 million, what is Grady's return on assets?

• A. 7.5 percent
• B. 13.3 percent
• C. 11.1 percent
• D. 15.0 percent

Answer: (B)

Return on assets shows how effectively a company uses its assets to generate profit, calculated as net income divided by total assets. Here, the profit margin is 15% on sales of 20 million, so net income = 0.15 × 20,000,000 = 3,000,000. ROA = 3,000,000 / 22,500,000 = 0.1333, or about 13.3%. The debt figure isn’t used in the ROA calculation; it affects leverage and ROE, not the ROA itself.