Question

Trend Analysis - The following data pertain to Company A:

(in millions)	Year 2	Year 1
Revenue	$39,474	$35,137
Net income	5,658	5,642
Accounts receivable	4,389	3,725
Inventory	2,290	1,926
Total current assets	10,151	9,130
Total assets	34,628	29,930
Total current liabilities	7,753	6,860
Total long-term liabilities	9,641	7,702
Total stockholder equity	20,000	18,000

Common-Size Income Statements - Company A reported the following income statements:

COMPANY A
INCOME STATEMENT
FOR THE YEARS ENDED DECEMBER YEAR 2 AND YEAR 1
(in millions)	Year 2	Year 1
Sales revenue	$39,474	$35,137
Costs of goods sold	18,038	15,762
Gross profit	21,436	19,375
Selling and administrative expenses	14,266	12,873
Income from operations	7,170	6,502
Interest expense	(224)	(239)
Interest income	125	173
Other income	560	553
Income before income taxes	7,631	6,989
Income tax expense	1,973	1,347
Net income	5,658	5,642

Using the data above, answer the following: (provide formulas used to answer questions)

(1) Show the decomposition of return on equity for Company A for Years 1 and 2?

(2) Compute the return on assets for Company A for Years 1 and 2?

(3) Comment on Company A's use of debt?

Trend Analysis - The following data pertain to Company B:

(in thousands)	Year 2	Year 1
Revenue	$1,285,876	$1,364,550
Net income	56,644	42,906
Accounts receivable	149,178	168,666
Inventory	158,541	179,688
Total current assets	670,337	649,903
Total asset	859,907	849,399
Total current liabilities	227,807	232,074
Total long-term liabilities	36,483	40,787
Total stockholder equity	595,617	576,538

Common-Size Income Statements - Company B reported the following income statements:

COMPANY B
INCOME STATEMENT
FOR THE YEARS ENDED DECEMBER YEAR 2 AND YEAR 1
(in thousands)	Year 2	Year 1
Sales revenue	$1,285,876	$1,364,550
Costs of goods sold	682,954	743,817
Gross profit	602,922	620,733
Selling and administrative expenses	525,448	551,097
Income from operations	77,474	69,636
Interest expense	(498)	(652)
Interest income	903	2,371
Other income	3,506	5,455
Income before income taxes	81,385	76,810
Income tax expense	24,741	33,904
Net income	56,644	42,906

Using the data provided above, answer the following questions: (provide formulas used to answer questions)

(4) Show the decomposition of return on equity for Company B for Years 1 and 2?

(5) Compute the return on assets for Company B for Years 1 and 2?

(6) Comment on Company B's use of debt?

Answer 1

1. Return on Equity Year 1 = Net Income / Total stockholder equity * 100

= 5658/20000*100

=28.29%

Return on Equity Year 2 = Net Income / Total stockholder equity * 100

= 5642/18000*100

=31.34%

2. Return on Assets for Year 1 = Net Income / Total assets *100

= 5658/34628*100

=16.34%

Return on Assets for Year 2 = Net Income / Total assets *100

= 5642/29930*100

= 18.85%

3. The debt of the company is favouring the company as debt equity ratio is proper and debt is decreasing hence with this ROE the comapny is sound.

4. Return on Equity for comany B For year 1 = Net Income / Total stockholder equity * 100

=56644/595617*100

=9.51%

Return on Equity for comany B For year 2 = Net Income / Total stockholder equity * 100

= 42906/576538*100

7.44%

5. Return on Assets for Year 1 = Net Income / Total assets *100

= 56644/859907*100

= 6.59%

Return on Assets for Year 2 = Net Income / Total assets *100

= 42906/849399*100

= 5.05%

6. Debt of company B is increasing and compared to year 1, its Retun on Equity is lower.