Question

Addai Company has provided the following comparative information:

20Y8 20Y7 20Y6 20Y5 20Y4
Net income $273,406 $367,976 $631,176 $884,000 $800,000
Interest expense 616,047 572,003 528,165 495,000 440,000
Income tax expense 31,749 53,560 106,720 160,000 200,000
Total assets (ending balance) 4,417,178 4,124,350 3,732,443 3,338,500 2,750,000
Total stockholders’ equity (ending balance) 3,706,557 3,433,152 3,065,176 2,434,000 1,550,000
Average total assets 4,270,764 3,928,396 3,535,472 3,044,250 2,475,000
Average total stockholders' equity 3,569,855 3,249,164 2,749,588 1,992,000 1,150,000
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 28%
Return on stockholders’ equity 18%
Times interest earned 2.7
Ratio of liabilities to stockholders’ equity 0.4
Required:
Determine the folllowing:
a. Return on total assets:
b. Return on stockholders' equity:
c. Times interest earned:

Answer 1

Return on total assets: (Net income + Interest expense)/ Average total assets

Return on stockholders’ equity : Net Income / Average Total stockholder

Explanation: I got the answer right

Answer 2

Answer and Explanation:

Return on Total Assets = Net Income/Average total assets

For 20Y8

Net income/Average total assets = 273,000/4417178 = 6.18%

Return on stockholder's equity

= Net income/average total stockholder's equity

For 20Y8

273,000/3569855 = 7.64%

Time interest earned

=Net income - Interest Expense - Income tax Expense/Interest Expense

=273,000 -616047 - 31,749 / 616,047

= -0.608

The ratios calculated above when measured by the industry ratio shows that Addai Company is not performing well. The ROA is less than the industry ratios which is basically how well the company is earning in respect to its total assets.

ROE states how well the company is earning in respect to the investments invested by the shareholders. The ratio is not good as compared to the industry ratios .

Times interest ratio tells you basically if the company is able to pay its interest. But the ratio states it isn't doing well.