Question

Solvency and Profitability Trend Analysis

Crosby Company has provided the following comparative information:

	20Y8		20Y7		20Y6		20Y5		20Y4
Net income	$5,571,720		$3,714,480		$2,772,000		$1,848,000		$1,400,000
Interest expense	1,052,060		891,576		768,600		610,000		500,000
Income tax expense	1,225,572		845,222		640,320		441,600		320,000
Total assets (ending balance)	29,378,491		22,598,839		17,120,333		12,588,480		10,152,000
Total stockholders’ equity (ending balance)	18,706,200		13,134,480		9,420,000		6,648,000		4,800,000
Average total assets	25,988,665		19,859,586		14,854,406		11,370,240		8,676,000
Average total stockholders' equity	15,920,340		11,277,240		8,034,000		5,724,000		4,100,000

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	19%
Return on stockholders’ equity	26%
Times interest earned	3.4
Ratio of liabilities to stockholders’ equity	1.4

Required:

1. Determine the following for the years 20Y4 through 20Y8 for each of the graphs below. Use the amounts given above in your calculations. 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. Overall, these ratios indicate  financial performance coupled with   use of debt (leverage).

Answer 1

1.
Return on Total Assets = Net Income / Average Total Assets
Return on Stockholder's Equity = Net Income / Average Stockholder's Equity
Times Interest Earned = (Net Income+Interest Expense+Income Tax Expense) / Interest Expense
Ratio of liabilities to stockholders' equity = Total Liabilities / Total Stockholder's Equity

		20Y8	20Y7	20Y6	20Y5	20Y4
	Net income	$    5,571,720	$    3,714,480	$      2,772,000	$1,848,000	$1,400,000
	Interest expense	$    1,052,060	$       891,576	$         768,600	610,000	500,000
	Income tax expense	$    1,225,572	$       845,222	$         640,320	441,600	320,000
	Total assets (ending balance)	$ 29,378,491	$ 22,598,839	$   17,120,333	12,588,480	10,152,000
	Total stockholders’ equity (ending balance)	$ 18,706,200	$ 13,134,480	$      9,420,000	6,648,000	4,800,000
	Average total assets	$ 25,988,665	$ 19,859,586	$   14,854,406	11,370,240	8,676,000
	Average total stockholders' equity	$ 15,920,340	$ 11,277,240	$      8,034,000	5,724,000	4,100,000
	Total Liabilities (ending balance)	$ 10,672,291	$    9,464,359	$      7,700,333	$    5,940,480	$    5,352,000
a	Return on total assets	21.4%	18.7%	18.7%	16.3%	16.1%
b	Return on stockholders’ equity	35.0%	32.9%	34.5%	32.3%	34.1%
c	Times interest earned	7.5	6.1	5.4	4.8	4.4
d	Ratio of liabilities to stockholders' equity	0.6	0.7	0.8	0.9	1.1

2. Overall, these ratios indicate favorable financial performance coupled with lower use of debt (leverage).