Financial analysis by ratios,horizantal & vertical analysis

Solution Preview

Dear student,
Analyse the financial performance of the company

I) By Ratio Analysis

Return on assets:

Return on assets =Net income/total assets
Return on assets indicates how much the management is efficient in generating the earnings from the assets available. Higher return on assets indicates that the management is efficient and lower Return on assets indicates that the inefficiency of the management. Return on assets should be compared with the Return on assets of the previous years and the industry average. To achieve higher ROA, the management has to make wise choices in allocating its resources.
In case of tootsie:
Return on Assets Net income /total assets 2006 2005 2006 2005
Net income 65919 77227 8.33 9.49
Total assets 791639 813696

Return on assets for the year 2005 is 9.49 and it is decreased slightly and the return on equity was 8.33. The reason behind this is decrease in the net income as the net income was 77227 (in' 000) and it was decreased to 65919('000) even though there is decline in the total assets.

Return on equity:
Return on equity =Net income/shareholders' equity
Here net income means earnings after preference dividend. Shareholders' equity does not include preference shares. Shareholders' equity= Total assets -total liabilities
Shareholders' equity can also be calculated by
Paid -up share capital + Reserves and Surplus + Net income earned during the year.

Return on equity indicates how much the management is efficient in generating profit from the every dollar of shareholders' equity.
Return on equity of the company should be compared with the Return on equity of other companies in the same industry and the return on equity of the company of the previous financial years. If the Return on equity is showing the increasing rate, the shareholders would be happy and they would not sell the shares and they will be induced to invest more shares in the company. Likewise, if the Return on equity of the company is lesser than the industry average, then the shareholders would be tempted to sell their shares and invest in other companies which yiled high return for their money. On the other hand, if the Return on equity is high in the industry, then the shareholders would retain their money as capital in the company and they would invest more by purchasing additional shares if the company comes out for public offer.
In case of tootsie:

Return on equity Net income/total shareholders' equity 2006 2005 2006 2005
Net income 65919 77227 10.45 12.51
shareholders' equity 630681 617405
Return on equity for the year 2005 is 12.51% and it was decreased and it stood at 10.45%. The reduction in the return on equity is due to the decline in the net income of the company. The net income of the company was 77227 (000) and the net income was reduced to 65919(000). The decline in net income has resulted in the reduction in the return on equity. Further, there is increase in denominator (shareholders' equity) which further reduced the shareholders' equity. The shareholders' equity $ 617405 (in '000) in the year 2005 and it was ...