Question

1. Trend Analysis

   Critelli Company has provided the following comparative information:

   	Year 5		Year 4		Year 3		Year 2		Year 1
   Net income	$1,283,300		$1,106,300		$929,700		$794,600		$673,400
   Interest expense	436,300		398,300		344,000		262,200		208,800
   Income tax expense	410,656		309,764		260,316		206,596		161,616
   Average total assets	7,676,786		6,777,477		5,789,545		4,915,349		4,181,043
   Average stockholders' equity	2,629,713		2,353,830		2,056,858		1,822,477		1,595,735

   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:

   	Industry Ratios
   Return on total assets	22.1 %
   Return on stockholders’ equity	45.6 %
   Times interest earned	4.6

   Instructions:

   Calculate three ratios for Year 1 through Year 5. Round to one decimal place.

   a. Return on total assets:

   Year 5	%
   Year 4	%
   Year 3	%
   Year 2	%
   Year 1	%

   b. Return on stockholders’ equity:

   Year 5	%
   Year 4	%
   Year 3	%
   Year 2	%
   Year 1	%

   c. Times interest earned:

   Year 5
   Year 4
   Year 3
   Year 2
   Year 1

Answer 1

The three ratios from Year 1 to Year 5 are calculated as follows:-

A.) Return on Total assets:-

Return on Total assets = Net Income/Average total assets

Particulars	Year 5	Year 4	Year 3	Year 2	Year 1
Net Income	1,283,300	1,106,300	929,700	794,600	673,400
Average total assets	7,676,786	6,777,477	5,789,545	4,915,349	4,181,043
Return on total assets	16.7%	16.3%	16.1%	16.2%	16.1%

The average rate of return on total assets for Critelli company is 16.3%. The company's return on total assets have been relatively lesser than that of the industry average. However, the rate of return on total assets have remained consistent throughout the 5 years.

B.) Return on Stockholders equity:-

Return on Shareholders equity = Net Income/Average shareholders Equity

Particulars	Year 5	Year 4	Year 3	Year 2	Year 1
Net Income	1,283,300	1,106,300	929,700	794,600	673,400
Average stockholders equity	2,629,713	2,353,830	2,056,858	1,822,477	1,595,735
Return on stockholders equity	48.8%	47.0%	45.2%	43.6%	42.2%

The return on stockholders equity measures the level of income that a shareholder gets on his/her investment. Based on the calculation above, the average return on stockholders equity for 5 years is 45.4% and the return on stockholders equity has been steadily increase from Year 1 through Year 5 and during Year 4 and Year 5 are more than the industry level ratios showing a positive performance.

C.) Times Interest earned ratio:-

Times Interest Earned Ratio = Earnings before Interest and taxes/Interest expense

Particulars	Year 5	Year 4	Year 3	Year 2	Year 1
Net Income	1,283,300	1,106,300	929,700	794,600	673,400
Interest expense	436,300	398,300	344,000	262,200	208,800
Income tax expense	410,656	309,764	260,316	206,596	161,616
EBIT(NI - Interest - Income tax)	436,344	398,236	325,384	325,804	302,984
Interest expense	436,300	398,300	344,000	262,200	208,800
Times Interest earned Ratio	1.0	1.0	0.9	1.2	1.5

The Times interest earned ratio is a general measure through a company's ability to meet its debt obligations on its current income is calculated. A higher ratio implies a higher ability while a lower ratio implies a lower ability. Considering the average times interest earned ratio of 4.6 for the industry the average Times interest earned ratio of Critelli company is 1.1 which is way lesser. Hence, the company has lesser earnings available to meet its interest obligations.