Network Communications has total assets of $1,400,000 and current assets of $600,000. It turns over its fixed assets 4 times a year. It has $300,000 of debt. Its return on sales is 5 percent. What is its return on stockholders' equity?

Return on equity = 35%

Explanation:

Return on equity is the proportion of the capital amount owned to owned to shareholders that is earned as profit. It is a measures of efficient the management in the use of equity capital to generate income for the investors.

It is calculated as follows:

Return on equity = (Operating income/equity capital)× 100

Sales/revenue =Asset turnover × total asset =1,400,000× 4 =5,600,000

Operating income = Return on sales × Turnover

                               = 5%× 5,600,000 =280000

Equity = Total assets - debt = 1,400,000 - 600,000= 800,000

Return on equity = (280,000/800,000)× 100 = 35%

Return on equity = 35%

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