Question

Slanina's Awesome Co. just released their financial results. This company sells propane and propane accessories. You are an analyst and you want to see how well they performed for their investors. You calculate some ratios and decide to compare them to previous years. Calculate ROE for each year (3 points) and describe what is going on with this company based on these ratios. (3 points) Tax Burden Net Income/EBT Interest Burden = EBT/EBIT EBIT Margin EBIT/Revenues Asset Turnover = Revenues/Average Total Assets Leverage Average Total Assets/Average Shareholder Equity 2012 68.30%54.70% 65.40%63.20% 2014 2013 2011 Tax Burden Interest 96.50% 92.70%90.20% Burden 88.50% EBIT Margin Asset 12% 14.30% 12.70% 16.20% 1.4 Turnover Leverage 1.2 1.2 1.3 1.9 2.1 2.2 2.4 ROE ?? B I i !!

Answer 1

ROE=( Net Income/Average Shareholders Equity)

or, ROE= (Net Income/EBT)*(EBT/EBIT)*(EBIT/Revenue)*(Revenue/Average Total Asset)*(Average Total Asset/Average Shareholders Equity)

=Tax burden*Interest burden*EBIT Margin*Asset Turnover* Leverage

Hence, below is the ROE for the following years:

А. | B C 1 Year 2014 2013 2 Tax burden | 68.30% 54.70% 3 Interest Burden | 96.50% 92.70% | 4 EBIT Margin I 12%] 12.70% 5 Asset Turnover | 1.2 1.40 6 Leverage 1 1.9] 2.10 7 ROE =B2*33*34*35*B6 D 2012 65.40% 90.20% 14.30% 1.20 2.20 22.27% E 2011 63.20% 88.50% 16.20% 1.30 2.40 28.27%

Α | 1 Year 2 Tax burden 3 Interest Burden 4 EBIT Margin 5 Asset Turnover 6 Leverage 7 ROE | B 2014 68.30% 96.50% 12% 1.2 1.9 18.03% C 2013 54.70% 92.70% 12.70% 1.40 2.10 18.93% D 2012 65.40% 90.20% 14.30% 1.20 2.20 22.27% E 2011 63.20% 88.50% 16.20% 1.30 2.40 28.27%

We can see that Return on equity is decreasing for the company. It means shareholders are getting lesser return on their investment. Also, we can see that tax burden, interest burden is increasing and EBIT margin is decreasing and it is contributing the lowering of ROE.

Hence, as an investor you should not invest into this company.