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Calculating Ratios; Report to the President

To better understand the past two years, the president asks you to create a financial income statement and balance sheet for AFC for the combined years of 2004 and 2005. Use this information to calculate the following ratios:

net margin
return on investment
return on equity

Write a letter to the president analyzing and comparing these ratios year to year. Point out which ones have improved the most and why.

The balance sheet and income statements are attached. There are also some templates that the instructor provided as guidance.


Solution Preview

Ratio calculations:

ROI for 2004 = NI/ TA = 120565/220565 = 54.7%
ROI for 2005 = NI/TA = 95200/298565 = 47.9%

Net Margin for 2004 = NI/ Net sales = 120565/350,000 = 34.4%
Net Margin for 2005 = NI/Net sales = 95200/450,000 = 21.1%

ROE for 2004 is the same as ROI
ROE for 2005 is the same as ROI

It is a curious situation that ROI and ROE would be identical, but it is explainable. With no debt of any kind, assets = equities. With debt, the ratios would not be same because total assets would not be the same as total stockholders' equity.

To the President

I have completed the financial statements including the income statement and the balance sheets on a comparative basis from 2005 to ...

Solution Summary

The solution shows the ratio calculations in detail. The letter to the President explains the purpose for the ratio analysis and discloses some problems which become apparent with the ratio comparisons.