Finance

[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

Less: Cost of goods sold

Gross profit

Less: Operating expenses

Less: Depreciation

Less: Interest

Income before taxes

Less: Income taxes

Net income

Cash dividends

$375

-225

150

-46

-25

-4

75

-20

$ 55

$ 17

$450

-270

180

-46

-30

-4

100

-30

$70

$ 20

BALANCE SHEETS AS OF DECEMBER 31 (IN $ THOUSANDS)

2012

2013

Cash

Accounts receivable

Inventories

Total current assets

Gross fixed assets

Less accumulated depreciation

Net fixed assets

Total assets

Accounts payable

Bank loan

Accrued liabilities

Total current liabilities

Long-term debt

Common stock

Retained earnings

$ 39

50

151

240

200

−95

105

$345

$ 30

20

10

60

15

85

185

$ 16

80

204

300

290

−125

165

$465

$ 45

27

23

95

15

120

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.

Net profit margin: 0.156 or 15.6 %

Sales-to-total asset ratio: 1.11 times

Return on assets: 0.173 or 17.3%

B. Calculate the ratios in the ROA model for both 2012 and 2013 using year-end total assets.

Comment on any financial ratio differences.

2013: ($70/450)*(450/(345+465/2))= 17.3%

2012: ($55/375)*(375/(345+365/2))=15.5%

They are different by 1.8% increase from 2012 to 2013.

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...