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

Answer 1

	2018		2017		2016		2015		2014
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

1. Return on Total Asset = (Net Income / Average Total Asset)

	2018		2017		2016		2015		2014
Net income	$1,014,300		$874,400		$734,800		$628,000		$532,200
Average total assets	7,593,296		6,718,644		5,752,571		4,912,941		4,200,000
Return on Total Asset	13.36%		13.01%		12.77%		12.78%		12.67%

2. Return on Stockholder Equity = (Net Income/ Average Stockholder Equity)

	2018		2017		2016		2015		2014
Net income	$1,014,300		$874,400		$734,800		$628,000		$532,200
Average stockholders' equity	2,554,912		2,307,124		2,035,457		1,820,290		1,607,855
Return on Stockholder Equity	39.70%		37.90%		36.10%		34.50%		33.10%

3. Ratio of Liabilities to Stock Holder Equity = (Total Asset- Stockholder Equity)/ Stockholder Equity

	2018		2017		2016		2015		2014
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
Ratio of Liabilities to Stock Holder Equity	2.21		1.78		2.12		1.59		2.27

4. Times Interest Earned = (Net Income + Interest + Income Tax )/ Interest

	2018		2017		2016		2015		2014
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
Times Interest Earned	4.88		4.56		4.46		4.82		5.00