Capital Intensity/Asset Turnover

Question

Silas 4-Wheeler, Inc., has an ROE of 18.10 percent, equity multiplier of 1.60, and a profit margin of 18.25 percent. What is the total asset turnover and the capital intensity? (Round your answers to 2 decimal places.) Total asset turnover? Capital intensity times?

 

Can someone show me how to solve this question?

Answer 1

This is an example of the DuPont equation.

ROA= Profit Margin X Assets Turn over X Equity Multiplier

ROA  =  Profit / Sales  X  Sales / Assets    X     Assets / Equity   

 

ROA = Profit/Sales  X    Sales / Assets       X      Assets/ Equity

Since the sales and assets cancel each other out why make it so complicated. Why not just Profit / Equity? This equation lets you know if you have a week income statement, lazy assets (bloated balance sheet) or over avoiding financial risk. Not charging enough, cost out of line, slow turning inventory, not collecting fast enough, excess fixed assets or not using judicious debt alternatives? CEO is having a meeting tomorrow at 10:30 AM. Who will be on the carpet? Will it be the sales manager, production manager, purchasing manager, or CFO?
Let’s do the math.

ROA = Margin X asset turns X equity multiplier
18.1% = 18.25% X ?? Asset Turns ?? X 1.6
18.1% = 29.20% X Asset Turns

.60 = Asset Turns

What is the capital intensity?

It is either .60 or the reciprocal 1.67.
Look up the definition. I’ll wait a few minutes.

It is the reciprocal, so it’s 1.67.

Is that good? Maybe if you are a steel mill but not a food wholesaler. There are data bases that show what the lower quartile, median and upper quartile are for various SIC code numbers.