Question

1.     [ROA and ROE models and Ratio Components] The Salza Technology Corporation successfully increased its “top line” sales from $375,000 in 2012 to $450,000 in 2013. Net income also increased as did the venture’s total assets. You have been asked to compare the financial performance between the two years.

Salza Technology Corporation

Annual Income Statements (in $ Thousands)

	2012	2013
Net sales	$375	$450
Less: Cost of goods sold	-225	-270
Gross profit	150	180
Less: Operating expenses	-46	-46
Less: Depreciation	-25	-30
Less: Interest	-4	-4
Income before taxes	75	100
Less: Income taxes	-20	-30
Net income	$ 55	$70
Cash dividends	$ 17	$ 20

Balance Sheets as of December 31 (in $ Thousands)

	2012	2013
Cash	$ 39	$ 16
Accounts receivable	50	80
Inventories	151	204
Total current assets	240	300
Gross fixed assets	200	290
Less accumulated depreciation	−95	−125
Net fixed assets	105	165
Total assets	$345	$465
Accounts payable	$ 30	$ 45
Bank loan	20	27
Accrued liabilities	10	23
Total current liabilities	60	95
Long-term debt	15	15
Common stock	85	120
Retained earnings	185	235
Total liabilities and equity	$345	$465

A.     Calculate the net profit margin and the sales-to-total assets ratio for Salza for 2013 using average total assets. Also calculate the return on total assets in 2013 using average total assets.

           

B.     Calculate the ratios in the ROA model for both 2012 and 2013 using year-end total assets. Comment on any financial ratio differences.

      

C.    Expand the 2013 ROA model discussed in Part A into an ROE model that includes financial leverage as measured by the equity multiplier. Use average owners’ or stockholders’ equity in your calculation.

     

D.    Expand the 2012 and 2013 ROA model calculations in Part B into ROE models based on year-end owners’ or stockholders’ equity amounts.

Answer 1

A. Net Profit margin ratio = NI/sales = 70/450 = 15.56%
Sales to Total Assets ratio (Total Assets turnover ratio) = 450/(345+465)/2 = 1.11
Return on total assets = NI /ATA = 70 / (345+465)/2 = 17.28%
B. Under ROA Model following ratios are there:
ROA = NI / TA = ROE / Leverage = (NI/Equity) / (TA/Equity) =
2012 = ROA = 55/(85+185) / [345/(85+185)] = 55 / 345 = 15.94%
2013 = ROA = 70/(120+235) / (465/(120+235)) = 70/435 = 16.09%
C. : ROA = NI / TA = ROE / Leverage = (NI/Equity) / (TA/Equity) =
ROA = 70/[(85+185+120+235)/2)] / [(345+465)/2] / [(85+185+120+235)/2)] = 70/435 = 16.09%
(70/312.5) / (405/312.5) = 17.28%
D. Expanding ROA Model following ratios of Part B:
ROA = NI / TA = ROE / Leverage = (NI/Equity) / (TA/Equity) =
2012 = ROA = 55/(85+185) / [345/(85+185)] = 55 / 345 = 15.94%
2013 = ROA = 70/(120+235) / (465/(120+235)) = 70/435 = 16.09%