Question

Solvency and Profitability Trend Analysis

Addai Company has provided the following comparative information:

	20Y8		20Y7		20Y6		20Y5		20Y4
Net income	$1,014,300		$874,400		$734,800		$628,000		$532,200
Interest expense	344,900		314,800		271,900		207,200		165,000
Income tax expense	324,576		244,832		205,744		163,280		127,728
Total assets (ending balance)	7,358,917		7,827,675		5,609,613		5,895,529		4,470,776
Total stockholders' equity (ending balance)	2,291,128		2,818,696		1,795,552		2,275,362		1,365,218
Average total assets	7,593,296		6,718,644		5,752,571		4,912,941		4,200,000
Average stockholders' equity	2,554,912		2,307,124		2,035,457		1,820,290		1,607,855

You have been asked to evaluate the historical performance of the company over the last five years.

Selected industry ratios have remained relatively steady at the following levels for the last five years:

	20Y4―20Y8
Return on total assets	17.6%
Return on stockholders’ equity	36.5%
Times interest earned	4.6
Ratio of liabilities to stockholders' equity	2.1

Required:

1. Determine the following for the years 20Y4 through 20Y8. Round to one decimal place:

a. Return on total assets:

20Y8	%
20Y7	%
20Y6	%
20Y5	%
20Y4	%

b. Return on stockholders’ equity:

20Y8	%
20Y7	%
20Y6	%
20Y5	%
20Y4	%

c. Times interest earned:

20Y8
20Y7
20Y6
20Y5
20Y4

d. Ratio of liabilities to stockholders' equity:

20Y8
20Y7
20Y6
20Y5
20Y4

2. Refer to the selected industry ratios provided above.

Both the rate earned on total assets and the rate earned on stockholders' equity have been moving in a positive  direction in the last five years. Both measures have moved above  the industry average over the last two years. The cause of this change is driven by a rapid increase  in earnings.

Answer 1

Please give positive ratings so I can keep answering. It would help me a lot. Please comment if you have any query. Thanks!

Addai Company
Items	20Y8	20Y7	20Y6	20Y5	20Y4
Net income	1,014,300.00	874,400.00	734,800.00	628,000.00	532,200.00
Interest expense	344,900.00	314,800.00	271,900.00	207,200.00	165,000.00
Income tax expense	324,576.00	244,832.00	205,744.00	163,280.00	127,728.00
Total assets (ending balance)	7,358,917.00	7,827,675.00	5,609,613.00	5,895,529.00	4,470,776.00
Total stockholders' equity (ending balance)	2,291,128.00	2,818,696.00	1,795,552.00	2,275,362.00	1,365,218.00
Average total assets	7,593,296.00	6,718,644.00	5,752,571.00	4,912,941.00	4,200,000.00
Average stockholders' equity	2,554,912.00	2,307,124.00	2,035,457.00	1,820,290.00	1,607,855.00
Workings
Net income	1,014,300.00	874,400.00	734,800.00	628,000.00	532,200.00
Add: Income tax expense	324,576.00	244,832.00	205,744.00	163,280.00	127,728.00
Add: Interest expense	344,900.00	314,800.00	271,900.00	207,200.00	165,000.00
Operating Income	1,683,776.00	1,434,032.00	1,212,444.00	998,480.00	824,928.00
Answer 1 a
Return on total assets:	13.4%	13.0%	12.8%	12.8%	12.7%
(Net income/ Average total assets)
Answer 1 b
Return on stockholders' equity:	39.7%	37.9%	36.1%	34.5%	33.1%
(Net income/ Average stockholders' equity)
Answer 1 c
Workings
Net income	1,014,300.00	874,400.00	734,800.00	628,000.00	532,200.00
Add: Income tax expense	324,576.00	244,832.00	205,744.00	163,280.00	127,728.00
Add: Interest expense	344,900.00	314,800.00	271,900.00	207,200.00	165,000.00
Operating Income	1,683,776.00	1,434,032.00	1,212,444.00	998,480.00	824,928.00
Times interest earned:	4.9	4.6	4.5	4.8	5.0
(Operating Income/ Interest expense)
Answer 1 d
Workings
Total assets (ending balance)	7,358,917.00	7,827,675.00	5,609,613.00	5,895,529.00	4,470,776.00
Less: Total stockholders' equity (ending balance)	2,291,128.00	2,818,696.00	1,795,552.00	2,275,362.00	1,365,218.00
Total liabilities	5,067,789.00	5,008,979.00	3,814,061.00	3,620,167.00	3,105,558.00
Liabilities to stockholders' equity:	2.2	1.8	2.1	1.6	2.3
Total liabilities/ Total stockholders' equity (ending balance)