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A Performance Appraisal

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Company "A" is a UK-based company producing and selling computer software to computer companies and health trusts. You must report back to your CEO on the financial status and performance of the Company "A", since your firm is interested in purchasing Company "A". First task is to identify the trends in return on equity and the main drivers of the trends using Du Pont analysis.
- Please find the correct tables with the proper formatting in the attached document.

Table 1: Financial data for Company "A" (£ thousands)
2011 2010 2009
Year-end data £ £ £
Revenue 72,448 66,487 55,781
Earning before interest and tax 6,270 4,710 3,609
Earning before tax 5,101 4,114 3,168
Net income 4,038 3,345 2,576
Asset turnover 0.79 0.76 0.68
Assets/Equity 3.09 3.38 3.43
Your CEO believes that the return on equity could be increased if the Company "A" divested segments that were generating the lowest returns on capital employed (total assets less non-interest-bearing liabilities). Segment EBIT margins in 2011 were 11% for Automation Equipment, 5% for Power and Industrial, and 8% for Medical Equipment.

Table 2: Year-end Capital employed and capital expenditures
Capital Employed Capital Expenditures
(excluding acquisitions)
In year
Operating Segments 2011 2010 2009 2011 2010 2009
Automation Equipment 10,705 6,384 5,647 700 743 616
Power and Industrial 15,805 13,195 12,100 900 849 634
Medical Equipment 22,870 22,985 22,587 908 824 749
49,380 42,564 40,334 2,508 2,416 1,999

1. An assessment of Company "A" return on equity trends over the three year period.
2. Identify the main driver of your CEO's belief (referred to above) regarding the Company's "A" return on equity.
3. Based on your CEO's criteria pertaining to divestiture (referred to above), identify the business segment best suited for divestiture and discuss the advisability of purchasing Company "A".

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Solution Preview

Please see the attached files.

I have calculated ROE. Please see the attached Excel file. Company A's ROE has improved considerably due to better asset turnover and margins.

Response to Q2 and Q3 was given in the attached word document. ...

Solution Summary

The solution discusses a performance appraisal.