Both Walmart and Dollar General are successful discount retailers, but Dollar General’s ROA was nearly double that of Walmart for their most recent fiscal year. To understand why, we can break ROA into two components: profit margin and asset turnover. ROA = profit margin x asset turnover Profit margin is net income divided by net sales, and it tells you how well a company managed its expenses. Profit margin = (Net income)/(Net sales) Asset turnover is net sales divided by average assets, and it tells you how productive a company’s assets were at generating sales. Asset turnover = (Net sales)/(Average assets) Walmart’s asset turnover was higher than Dollar General’s, as Walmart generate $2.48 of sales for every dollar of assets. But Dollar General’s profit margin was more than triple that of Walmart. Thus, Dollar General had a higher ROA because it was a lot better than Walmart at keeping its …
