Question

1. Recent financial statements for a major public company reports the following:

Average total assets	$2,355,000
Average shareholders' equity	$1,295,000
Net income	$211,750

Required:

1. Calculate the company’s return on equity and return on assets.
2. If the average ROE = 10.5% and average ROA = 6.5%; discuss the company’s ROE and ROA performance relative to its industry’s average.
3. If the mean 5-year average ROE and ROA for the company are 6.2% and 3.8%; discuss the company’s ROE and ROA performance relative to their recent average performance.
4. Given your comments above, would you consider investing in the company’s common stock, pending further investigation of other relevant issues? Please explain your answer.

Answer 1

Part a	Return on equity(ROE) =[($211,750 / $1,295,000)*100] =16.35%
	Return on Assets(ROA) =[($211,750 / $2,355,000)*100] =8.99%
Part b	The company's Performance relative to industry's average is much better due to the higher ROE and ROA.
Part c	The compan's recent performance is not that good, Considering that the company's performance in this year is quite extraordinary
	This sudden rise in performance may be due to any exceptional items which may have elevated the company's profit and thus
	as a result the extraordinary rise in ROE and ROA.
Part d	Sure the company's performance in the current year is more than expected and better than the industry average and the company's past
	performance. But an investing decision should not only be based on the current year performance. The past performance should also
	be considered and then only a decision should be taken on it. Like as explained in Part C there might be some exceptionla item which
	could have inflated the profit and hence if that item exists then the same should be adjusted to find the appropiate average ROE or ROA