FUNDAMENTALS OF

SENIOR
ACCOUNTANCY, BUSINESS HIGH
AND MANAGEMENT 2 (FABM 2) SCHOOL
2
Computations and Interpretation of Self-
Learning
Financial Ratios – Operating Expenses to Module
Sale Ratio, Return on Assets, Return on 18
Equity, and Asset Turnover Ratio Quarter 1
Fundamentals of Accountancy, Business and Management 2 (FABM2) – Grade 12
Quarter 1 – Self-Learning Module 18: Computations and Interpretation of Financial
Ratios: Operating Expenses to Sale Ratio, Return on Assets, Return on Equity, and
Asset Turnover Ratio
First Edition, 2020

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 FABM2 SENIOR
HIGH
SCHOOL

Self-
Learning
Module
18

Quarter 1

Computations and Interpretation of Financial

Ratios – Operating Expenses to Sale Ratio, Return
on Assets, Return on Equity, and Asset Turnover
Ratio
Introductory Message

For the facilitator:

Welcome to the Fundamentals of Accountancy, Business and Management 2

for Grade 12 Self-Learning Module on Computations and Interpretation of Financial
Ratios: Operating Expenses to Sale Ratio, Return on Assets, Return on Equity, and
Asset Turnover Ratio!

This Self-Learning Module was collaboratively designed, developed, and

reviewed by educators from the Schools Division Office of Pasig City headed by its
Officer-in-Charge Schools Division Superintendent, Ma. Evalou Concepcion A.
Agustin, in partnership with the City Government of Pasig through its mayor,
Honorable Victor Ma. Regis N. Sotto. The writers utilized the standards set by the K
to 12 Curriculum using the Most Essential Learning Competencies (MELC) in
developing this instructional resource.

This learning material hopes to engage the learners in guided and independent
learning activities at their own pace and time. Further, this also aims to help learners
acquire the needed 21st century skills especially the 5 Cs, namely: Communication,
Collaboration, Creativity, Critical Thinking, and Character while taking into
consideration their needs and circumstances.

In addition to the material in the main text, you will also see this box in the
body of the module:

Notes to the Teacher

This contains helpful tips or strategies that
will help you in guiding the learners.

As a facilitator, you are expected to orient the learners on how to use this
module. You also need to keep track of the learners' progress while allowing them to
manage their own learning. Moreover, you are expected to encourage and assist the
learners as they do the tasks included in the module.
For the learner:

Welcome to the Fundamentals of Accountancy, Business and Management 2

Self-Learning Module on Computations and Interpretation of Financial Ratios:
Operating Expenses to Sale Ratio, Return on Assets, Return on Equity and Asset
Turnover Ratio!

This module was designed to provide you with fun and meaningful
opportunities for guided and independent learning at your own pace and time. You
will be enabled to process the contents of the learning material while being an active
learner.

This module has the following parts and corresponding icons:

Expectations – These point to the set of knowledge and skills

that you will learn after completing the module.

Pretest - This measures your prior knowledge about the lesson

at hand.

Recap - This part of the module provides a review of concepts

and skills that you already know about a previous lesson.

Lesson - This section discusses the topic in the module.

Activities – These are sets of activities that you need to

perform.

Wrap Up - This section summarizes the concepts and

application of the lesson.

Valuing - This part integrates a desirable moral value in the

lesson.

Posttest - This measures how much you have learned from the
entire module.
 EXPECTATIONS
After going through this self-learning module, you are expected to:
1. Compute operating expenses to sale ratio, return on assets, return on
equity and asset turnover ratio;
2. Interpret operating expenses to sale ratio, return on assets, return on
equity and asset turnover ratio; and
3. reflect on the importance of these ratios in business operation.

PRETEST

Multiple Choice. Directions: Encircle the letter of the best answer.

1. Return on equity reveals how much after-tax income a company earned
in comparison to the total amount of shareholder equity found on the
balance sheet.
A. operating expenses to sale ratio
B. return on assets
C. return on equity
D. asset turnover ratio

2. It is a profitability ratio that measures the net income produced by total

assets during a period by comparing net income to the average total
assets.
A. operating expenses to sale ratio
B. return on assets
C. return on equity
D. asset turnover ratio

3. The asset turnover ratio, also known as the total asset turnover ratio,
measures the efficiency with which a company uses its assets to
produce sales.
A. operating expenses to sale ratio
B. return on assets
C. return on equity
D. asset turnover ratio
4. Which of the following ratios will show how efficient a company's
management is at keeping costs low while generating revenue or sales?
A. operating expenses to sale ratio
B. return on assets
C. return on equity
D. asset turnover ratio

5. The formula to be used in computing _________ is profit divided by

average total assets.
A. operating expenses to sale ratio
B. return on assets
C. return on equity
D. asset turnover ratio

E. RECAP

Truth or Lies! Directions: Analyze the given statements. Put a

checkmark (/) if the statement is correct and X if it is wrong. Write
your answer in the space provided.

The debt to equity ratio is a financial ratio that compares

1.
a company’s total assets to total equity.
Gross profit ratio (GP ratio) is a profitability ratio that
2.
shows the relationship between gross profit and total net
sales revenue.
The profit margin ratio shows what percentage of sales
3.
are left over after all expenses are paid by the business.

The times interest earned ratio, sometimes called the

4.
interest coverage ratio, is a coverage ratio that measures
the proportionate amount of income that can be used to
cover interest expenses in the future.

Debt to total equity ratio = total assets ÷ total shareholder

5.
equity.
 LESSON

Take a look at the given table.

2018
Operating expenses Php 460,000
÷
Net sales 1,000,000
Operating expenses to sale ratio 46%

What is meant by 46%? What is the significance of computing

operating expenses to sale ratio?

To answer these questions, we are going to discuss another set of

financial ratios.

Computations and Interpretation of Financial Ratios: Operating

Expenses to Sale Ratio, Return on Assets, Return on Equity, and Asset
Turnover Ratio

a. The Operating Expenses to Sale Ratio

The operating expenses to sale ratio shows the efficiency of a company's
management by comparing the total operating expense of a company to net
sales. Operating expenses are classified into general and administrative
expenses and selling expenses. These expenses are needed to generate sales.
The operating ratio shows how efficient a company's management is at
keeping costs low while generating revenue or sales. The smaller the ratio, the
more efficient the company is at generating revenue versus total expenses. It
indicates how much each peso in sales revenue cost the company to achieve.
An operating expense ratio of 0.63 means that for every peso of sales, the
company spent 63 cents to create the sale. One of the most important
considerations with this ratio is the direction is takes over time. An expense
ratio that is increasing over time means the company is operating less
efficiently from period to period.
The formula to be used in computing for operating expenses to sale
ratio is:
Operating expenses to sale ratio = operating expenses ÷ net sales
2018
Operating expenses Php 460,000
÷
Net sales 1,000,000
Operating expenses to sale ratio 46%

2019
Operating expenses Php 481,000
÷
Net sales 1,047,050
Operating expenses to sale ratio 45.94%
Figure 18.1. Operating Expenses to Sale Ratio
The operating expenses to sale ratio in 2019 slightly decreased this
means that there is still improvement in the operating expenses to sales
ratio. This can be attributed to lower operating expenses and increase in
net sales.
b. Return on Assets
The return on assets ratio, often called the return on total assets, is a
profitability ratio that measures the net income produced by total assets
during a period by comparing net income to the average total assets. In other
words, the return on assets ratio or ROA measures how efficiently a company
can manage its assets to produce profits during a period.

Since company assets’ sole purpose is to generate revenues and

produce profits, this ratio helps both management and investors see how well
the company can convert its investments in assets into profits. You can look
at ROA as a return on investment for the company since capital assets are
often the biggest investment for most companies. In this case, the company
invests money into capital assets and the return is measured in profits.

In short, this ratio measures how profitable a company’s assets are.

It only makes sense that a higher ratio is more favorable to investors

because it shows that the company is more effectively managing its assets to
produce greater amounts of net income. A positive ROA ratio usually indicates
an upward profit trend as well.
The formula to be used in computing return on assets is:
Return on assets = profit ÷ average total assets.
2018
Profit Php 224,500
÷
Average total assets 644,000
Return on assets .349
C
Profit Php 232,400
÷
Average total assets 657,600
Return on assets .353
Figure 18.2. Return on Assets
Comparing the data for two years, it shows that there is an increase in
the return on assets. This is an indication of effectively managing its assets
to produce increase amounts of net income.
c. Return on Equity

One of the most important profitability metrics for investors is a

company's return on equity (ROE). Return on equity reveals how much after-
tax income a company earned in comparison to the total amount
of shareholder equity found on the balance sheet. In other words, it conveys
the percentage of investor peso that have been converted into income, giving
a sense of how efficiently the company is handling their money. A business
with a higher return on equity is more likely to be one that can better generate
income with new investment.

The key to finding stocks that are lucrative investments in the long run
often involves finding companies capable of consistently generating an
outsized return on equity over many decades. Once you've found a company
with this pattern, then you must try to acquire stock in that company at
reasonable prices.

The formula to be used in computing for return on equity:

Return on equity = profit ÷ average stockholder equity

2018
Profit Php 224,500
÷
Average stockholder equity 544,300
Return on equity .41

2019
Profit Php 232,400
÷
Average stockholder equity 547,600
Return on equity .42
Figure 18.3. Return on Equity
 In 2019, the return in equity slightly increased. This can be attributed
to increase in net income of the company.

d. Asset Turnover Ratio

The asset turnover ratio, also known as the total asset turnover ratio,
measures the efficiency with which a company uses its assets to
produce sales. The asset turnover ratio formula is equal to net sales divided
by the total or average assets of a company. A company with a high asset
turnover ratio operates more efficiently as compared to competitors with a
lower ratio.
The ratio measures the efficiency of how well a company uses assets to
produce sales. A higher ratio is favorable, as it indicates a more efficient use
of assets. Conversely, a lower ratio indicates the company is not using its
assets as efficiently. This might be due to excess production capacity, poor
collection methods, or poor inventory management.
The formula that can be used in computing for asset turnover ratio:
Asset turnover ratio = net sales ÷ average total assets
2018
Net sales Php 1,000,000
÷
Average total assets 644,000
Asset turnover ratio 1.5

2019
Net sales Php 1,047,050
÷
Average total assets 657,600
Asset turnover ratio 1.59
Figure 18.4. Asset Turnover Ratio
The asset turnover ratio slightly increased in 2019. This is something
positive. This can be attributed to higher sales generated in 2019.
 ACTIVITIES

I. Practice.
Let’s do it!
Problem Solving. Directions: Given below is JC Company’s financial
statements. Compute for the following financial ratios and show the solutions
in a sheet of paper.

1. expenses to sale ratio

2. return on assets
3. return on equity
4. asset turnover ratio

2019 2018
Cash 122,500 104,700
Accounts Receivables 90,650 80,550
Inventory 66,200 53,000
Prepaid Expenses 85,450 106,000
Total Curent Assets 364,800 344,250
Property, Plant and Equipment 925,000 786,850
Total Assets 1,654,600 1,475,350

Total current liabilities 381,500 423,350

Long-term Liabilities 359,900 230,600
JK, Capital 913,200 821,400
Total Liabilities and Equity 1,654,600 1,475,350

Sales 1,047,050 1151755

Cost of Sales 322,750 355025
Gross Profit 724,300 796730
Selling Expenses 353,250 388575
Administrative Expenses 128,150 140965
Operating Income 242,900 267190
Interest Expense 10,500 11550
Net Income 232,400 255640

II. Keep Practicing

I can do it! Directions: Interpret the results of your computation in Activity

I for the following ratios:
 1. expenses to sale ratio
___________________________________________________________________________
___________________________________________________________________________
2. return on assets
___________________________________________________________________________
___________________________________________________________________________
3. return on equity

___________________________________________________________________________
___________________________________________________________________________

4. asset turnover ratio

___________________________________________________________________________
___________________________________________________________________________

WRAPUP

Let’s wrap up!

➢ How are you going to compute for operating expenses to sale ratio,
return on assets, return on equity and asset turnover ratio? Give the
formula.

➢ What are the ideal results for operating expenses to sale ratio, return
on assets, return on equity and asset turnover ratio?

VALUING

➢ Why it is important to various business stakeholders to have a better

result in operating expenses to sale ratio, return on assets, return on
equity and asset turnover ratio?
 POSTTEST

Fill-in-the blanks. Directions: Supply the missing word/s in the following

statements. Choose from the words inside the box. Write your answer in the
space provided.

Higher asset turnover lower

Return on assets operating expenses to sale

1. The ____________ ratio measures how efficiently a company can

manage its assets to produce profits during a period.

2. A business with a __________ return on equity is more likely to be

one that can better generate income with new investment.

3. The ____________ ratio formula is equal to net sales divided by the

total or average assets of a company.

4. The _____________ratio shows the efficiency of a company's

management by comparing the total operating expense of a
company to net sales.

5. A ___________ asset turnover ratio is favorable, as it indicates a more

efficient use of assets.
 KEY TO CORRECTION
higher 5. 5. X 5. B
Operating expenses to sale 4. 4. / 4. A
Asset turn over 3. 3. / 3. D
higher 2. 2. / 2. B
Return on assets 1. 1. X 1. C
Post test Recap Pretest

R E F E R E N CE S

Beticon, J. L., Domingo, JC. D., Yabut, FA. D. 2016. Fundamentals of

Accountancy, Business, and Management 2, Teacher’s Manual.
Quezon City: Vibal Group Inc.
Beticon, J. L., Domingo, JC. D., Yabut, FA. D. 2016. Fundamentals of
Accountancy, Business, and Management 2. Quezon City: Vibal
Group Inc.
Binuya, MVJ. M. 2016. Fundamentals of Accountancy, Business, and
Management Book 2. Manila: JFS Publishing Services.
Manuel, Z. V. 2016. 21st Century Accounting Process, International Edition.
Manila: Raintree Traiding and Publishing, Inc.
Monfero, RP. P., Andres, C. S., Salazar, DR. C., Honorario, C. B. Teaching
Guide for Senior High School, Fundamentals of Accountancy, Business,
and Management Book 2. Quezon City: Commission on Higher
Education.
Salazar, D. R. 2017. Fundamentals of Accountancy, Business, and
Management 2. Manila: Rex Bookstore Inc.

Online References

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https://www.investopedia.com/terms/o/operatingratio.asp7/25/20208:12
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https://www.thebalance.com/return-on-equity-roe-357601 7/25/2020 8:33

am

https://corporatefinanceinstitute.com/resources/knowledge/finance/asset-
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