1. [ROA and ROE models and Ratio Components] The Salza Technology Corporation su
ID: 2342977 • Letter: 1
Question
1. [ROA and ROE models and Ratio Components] The Salza Technology Corporation successfully increased its “top line” sales from $375,000 in 2012 to $450,000 in 2013. Net income also increased as did the venture’s total assets. You have been asked to compare the financial performance between the two years.
Salza Technology Corporation
Annual Income Statements (in $ Thousands)
2012
2013
Net sales
$375
$450
Less: Cost of goods sold
-225
-270
Gross profit
150
180
Less: Operating expenses
-46
-46
Less: Depreciation
-25
-30
Less: Interest
-4
-4
Income before taxes
75
100
Less: Income taxes
-20
-30
Net income
$ 55
$70
Cash dividends
$ 17
$ 20
Balance Sheets as of December 31 (in $ Thousands)
2012
2013
Cash
$ 39
$ 16
Accounts receivable
50
80
Inventories
151
204
Total current assets
240
300
Gross fixed assets
200
290
Less accumulated depreciation
95
125
Net fixed assets
105
165
Total assets
$345
$465
Accounts payable
$ 30
$ 45
Bank loan
20
27
Accrued liabilities
10
23
Total current liabilities
60
95
Long-term debt
15
15
Common stock
85
120
Retained earnings
185
235
Total liabilities and equity
$345
$465
A. Calculate the net profit margin and the sales-to-total assets ratio for Salza for 2013 using average total assets. Also calculate the return on total assets in 2013 using average total assets.
B. Calculate the ratios in the ROA model for both 2012 and 2013 using year-end total assets. Comment on any financial ratio differences.
C. Expand the 2013 ROA model discussed in Part A into an ROE model that includes financial leverage as measured by the equity multiplier. Use average owners’ or stockholders’ equity in your calculation.
D. Expand the 2012 and 2013 ROA model calculations in Part B into ROE models based on year-end owners’ or stockholders’ equity amounts.
2012
2013
Net sales
$375
$450
Less: Cost of goods sold
-225
-270
Gross profit
150
180
Less: Operating expenses
-46
-46
Less: Depreciation
-25
-30
Less: Interest
-4
-4
Income before taxes
75
100
Less: Income taxes
-20
-30
Net income
$ 55
$70
Cash dividends
$ 17
$ 20
Explanation / Answer
A. Net Profit margin ratio = NI/sales = 70/450 = 15.56% Sales to Total Assets ratio (Total Assets turnover ratio) = 450/(345+465)/2 = 1.11 Return on total assets = NI /ATA = 70 / (345+465)/2 = 17.28% B. Under ROA Model contains following : ROA = NI / TA = ROE ratio / Leverage ratio = (NI/Equity) / (TA/Equity) = 2012 = ROA = 55/(85+185) / [345/(85+185)] = 55 / 345 = 15.94% 2013 = ROA = 70/(120+235) / (465/(120+235)) = 70/435 = 16.09% The Income has been appreciated more than assets in 2013, which provides us with higher ROA as comparable to 2012. C. : ROA = NI / TA = ROE / Leverage = (NI/Equity) / (TA/Equity) = ROA = 70/[(85+185+120+235)/2)] / [(345+465)/2] / [(85+185+120+235)/2)] = 70/435 = 16.09% (70/312.5) / (405/312.5) = 17.28% D. Expanding ROA Model following ratios of Part B: ROA = NI / TA or ROE ratio / Leverage ratio = (NI/Equity) / (TA/Equity) = 2012 = ROA = 55/(85+185) / [345/(85+185)] = 55 / 345 = 15.94% 2013 = ROA = 70/(120+235) / (465/(120+235)) = 70/435 = 16.09%
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