Exam 4: Profitability Analysis

To reduce the risk inherent in ______________________________ a company should strive for a high proportion of variable costs in its cost structure.

Net Devices Inc. The following balance sheets and income statements are for Net Devices Inc., a manufacturer of small electronic devices, including calculators, personal digital assistants and mp3 players. For purposes of these questions assume that the company has an effective tax rate of 35%. $\text { INCOME STATEMENTS ( } \$ \text { in thousands) }$ Fiscal year end Net sales Cost of Goods Sold Gross profit Selling, general \& admin. Exp. Income before deprec. \& amort. Depreciation \& amortization Interest expense Income before tax Provision for income taxes Minority interest Net income Outstanding shares (in thousands) Preferred Dividends (in thousands) 2011 \ 11,455,500 3,429,050 1,592,650 (785,250) 761,205 (157,725) 308,515 \ 85000 2010 \ 11,082,100 3,142,035 1,352,835 (757,250) 552,245 (112,290) 303,095 \ 85,000 - Refer to the information for Net Devices Inc. What is the profit margin for ROA for Net Devices for 2010?

Linda's Clothing is a retailer of contemporary women's clothing. Selected financial information for Linda's appears below: 2011 2010 2009 2008 Net Income \ 56,759 \ 31,150 \ 15,375 \1 4,750 Total Assets at year-end \ 381,500 \ 246,250 \ 145,490 \ 71,268 Weighted Average number of shares Outstanding 84,215 80,546 77,965 75,888 Total Liabilities at year-end 205,967 119,657 60,522 17,623 Common Stockholders Equity at year-end \ 175,533 \ 126,593 \ 84,968 \5 3,645 Interest Expense 165 195 258 368 Required: a. Compute the rate of return on assets for the years 2009-2011. Linda’s has an effective tax rate of 35%. b. Compute the rate of return on common shareholders’ equity for the years 2009-2011. c. Compute basic earnings per share for the years 2009-2011. d. Interpret the changes in ROA versus ROCE and EPS over the three-year period.

Ramos Company included the following information in its annual report: 2011 2010 2009 Sales \ 178,400 \ 162,500 \ 155,500 Cost of goods sold 115,000 102,500 100,000 Operating expenses 50,000 50,000 45,000 Net incoume 13,400 10,000 10,500 - Refer to the information for Ramos Company. In a common size income statement for 2011, the operating expenses are expressed as:

The ability of a firm to generate income from operations given a particular level of sales is measured by the ______________________________.

One important difference between return on assets (ROA) and return on common shareholder's equity (ROCE) is

Common-size analysis requires the analyst to be aware that percentages can change because of all of the following except:

Net Devices Inc. The following balance sheets and income statements are for Net Devices Inc., a manufacturer of small electronic devices, including calculators, personal digital assistants and mp3 players. For purposes of these questions assume that the company has an effective tax rate of 35%. BALANCE SHEETS $\text { ASEETS (\$in thousands) }$ Fiscal year end Cash Marketable securities Receivables Inventories Other current assets Total current assets Property, plant \& equipment Intangibles Deposits \& other assets Total assets 2011 \ 875,650 6,560 771,580 1,320,150 3,222,940 1,118,750 263,050 2010 \ 571,250 0 775,250 1,254,600 2,832,300 1,100,300 241,000 2009 \ 154,230 0 902,000 1,418,500 2,704,630 1,122,400 215,600 $\text { LIABLIIES ( \$ in thousands) }$ Fiscal year end Accounts payable Current long term debt Acculed expenses Income taxespayable Other curent liabilities Total current liabilities Long term debt Other long term liabilities Total liabilities Preferred stock Common stock net Adchtional Paid-in Capital Retained earnings Treasuy stock Shareholders' equity Total Liab \& Equity 2011 \ 1,178,540 18,100 664,100 138,900 1,999,640 478,250 2,491,240 850,000 4,000 869,000 1,430,500 2010 \ 1,061,100 316,500 615,900 108,400 2,101,900 378,400 2,480,300 850,000 3,950 758,000 1,055,000 2009 \ 1,138,250 150,900 585,400 38,200 1,912,750 599,630 2,512,380 550,000 3,800 689,500 1,245,050 $\text { INCOME S'TATEMENTS (\$ in thousands) }$ Fiscal year end Net sales Cost of Goods Sold Grosspiofit Selling, general \& admin. Exp. Income before deprec. \& amort. Depreciation \& amortization Interest expense Income before tax Provision for income taxes Minority interest Net income Outstanding shares(in thousands) Preferred Dividends (in thousands) 2011 \ 11,455,500 3,429,050 1,592,650 (785,250) 761,205 (157,725) 308,515 \8 5,000 2010 \ 11,082,100 3,142,035 1,352,835 (757,250) 552,245 (112,290) 303,095 \8 5,000 - Refer to the information for Net Devices Inc. What is Net Devices' return on common shareholders' equity for 2011?

The numerator of the return on assets ratio is net income from operations excluding the effects of any ______________________________.

Examine the four following conditions involving inventory turnover. Discuss what economic factors might be leading to the condition and whether it suggests positive or negative future economic conditions. Condition A: Increasing cost of goods soll to sales percentage, coupled with an increasing inventory turnover. Condition C: Increasing cost of goods soll to sales percentange, coupled with a decreasing inventory turnover. Condition B: Decrensing cost of goods soll to sales percentage, coupled with a decreasing inventory tumover. Condition D: Decreasing cost of goods sold to salespercentage, coupled with an increasing inventory turnover.

Carridine Company reported net income of $1,903 on revenues of $55,618 for Year 4. Interest expense totaled $459, and preferred dividends totaled $13.5. Average total assets for Year 4 were $17,500. The income tax rate is 40 percent. Average preferred shareholders' equity totaled $250, and average common shareholders' equity totaled $7,500. Assume that all the following amounts are in thousands. REQUIRED: a. Compute the rate of ROA. Disaggregate ROA into profit margin for ROA and assets turnover components. b. Compute the rate of ROCE. Disaggregate ROCE into profit margin for ROCE, assets turnover, and capital leverage ratio components. c. Calculate the amount of net income to common shareholders derived from the excess return on creditors' capital, the excess return on preferred shareholders' capital, and the return on common shareholders' capital.

Extreme Sports Company and All Sports Corporation. Below is financial information for two sporting goods retailers. Extreme Sports Company operates a retail business and franchising business. At the end 2011, Extreme Sports had 263 Company-owned and 120 franchise-operated retail stores. Extreme's stores are located in suburban, strip mall and regional mall locations, the company operates in 32 states. All Sports Corporation sells sporting goods and related products at over 2,500 Company-operated retail stores. Selected Data for All Sports and Extreme Sports (amounts in millions) All Sports Extreine Sport Sales \ 5,320 \ 1,344 Cost of GoodsSold 3,897 887 Interest Expense 138 43 Net Income 212 33 Average Inventory 998 286 Average Fixed Assets 1,163 130 Average Total Assets 2,472 662 Average Tax Rate 40\% 40\% - Refer to the information for Extreme Sports Company and All Sports Corporation. What is the return on assets for All Sports?

Net Devices Inc. The following balance sheets and income statements are for Net Devices Inc., a manufacturer of small electronic devices, including calculators, personal digital assistants and mp3 players. For purposes of these questions assume that the company has an effective tax rate of 35%. BALANCE SHEETS $\text { ASEETS (\$in thousands) }$ Fiscal year end Cash Marketable securities Receivables Inventories Other current assets Total current assets Property, plant \& equipment Intangibles Deposits \& other assets Total assets 2011 \ 875,650 6,560 771,580 1,320,150 3,222,940 1,118,750 263,050 2010 \ 571,250 0 775,250 1,254,600 2,832,300 1,100,300 241,000 2009 \ 154,230 0 902,000 1,418,500 2,704,630 1,122,400 215,600 $\text { LIABLIIES ( \$ in thousands) }$ Fiscal year end Accounts payable Current long term debt Acculed expenses Income taxespayable Other curent liabilities Total current liabilities Long term debt Other long term liabilities Total liabilities Preferred stock Common stock net Adchtional Paid-in Capital Retained earnings Treasuy stock Shareholders' equity Total Liab \& Equity 2011 \ 1,178,540 18,100 664,100 138,900 1,999,640 478,250 2,491,240 850,000 4,000 869,000 1,430,500 2010 \ 1,061,100 316,500 615,900 108,400 2,101,900 378,400 2,480,300 850,000 3,950 758,000 1,055,000 2009 \ 1,138,250 150,900 585,400 38,200 1,912,750 599,630 2,512,380 550,000 3,800 689,500 1,245,050 $\text { INCOME S'TATEMENTS (\$ in thousands) }$ Fiscal year end Net sales Cost of Goods Sold Grosspiofit Selling, general \& admin. Exp. Income before deprec. \& amort. Depreciation \& amortization Interest expense Income before tax Provision for income taxes Minority interest Net income Outstanding shares(in thousands) Preferred Dividends (in thousands) 2011 \ 11,455,500 3,429,050 1,592,650 (785,250) 761,205 (157,725) 308,515 \8 5,000 2010 \ 11,082,100 3,142,035 1,352,835 (757,250) 552,245 (112,290) 303,095 \8 5,000 - Refer to the information for Net Devices Inc. What is Net Devices' earnings per share for 2011?

Net Devices Inc. The following balance sheets and income statements are for Net Devices Inc., a manufacturer of small electronic devices, including calculators, personal digital assistants and mp3 players. For purposes of these questions assume that the company has an effective tax rate of 35%. BALANCE SHEETS \ $\text { ASEETS (\$in thousands) }$ Fiscal year end Cash Marketable securities Receivables Inventories Other current assets Total current assets Property, plant \& equipment Intangibles Deposits \& other assets Total assets 2011 \ 875,650 6,560 771,580 1,320,150 3,222,940 1,118,750 263,050 2010 \ 571,250 0 775,250 1,254,600 2,832,300 1,100,300 241,000 2009 \ 154,230 0 902,000 1,418,500 2,704,630 1,122,400 215,600 $\text { LIABLIIES ( \$ in thousands) }$ Fiscal year end Accounts payable Current long term debt Acculed expenses Income taxespayable Other curent liabilities Total current liabilities Long term debt Other long term liabilities Total liabilities Preferred stock Common stock net Adchtional Paid-in Capital Retained earnings Treasuy stock Shareholders' equity Total Liab \& Equity 2011 \ 1,178,540 18,100 664,100 138,900 1,999,640 478,250 2,491,240 850,000 4,000 869,000 1,430,500 2010 \ 1,061,100 316,500 615,900 108,400 2,101,900 378,400 2,480,300 850,000 3,950 758,000 1,055,000 2009 \ 1,138,250 150,900 585,400 38,200 1,912,750 599,630 2,512,380 550,000 3,800 689,500 1,245,050 $\text { INCOME S'TATEMENTS (\$ in thousands) }$ Fiscal year end Net sales Cost of Goods Sold Grosspiofit Selling, general \& admin. Exp. Income before deprec. \& amort. Depreciation \& amortization Interest expense Income before tax Provision for income taxes Minority interest Net income Outstanding shares(in thousands) Preferred Dividends (in thousands) 2011 \ 11,455,500 3,429,050 1,592,650 (785,250) 761,205 (157,725) 308,515 \8 5,000 2010 \ 11,082,100 3,142,035 1,352,835 (757,250) 552,245 (112,290) 303,095 \8 5,000 - Refer to the information for Net Devices Inc. What is Net Devices' capital structure leverage ratio for 2011?

Ramos Company included the following information in its annual report: 2011 2010 2009 Sales \ 178,400 \ 162,500 \ 155,500 Cost of goods sold 115,000 102,500 100,000 Operating expenses 50,000 50,000 45,000 Net incoume 13,400 10,000 10,500 - Refer to the information for Ramos Company. In a percentage change income statement over the period of 2009 to 2011, what is the change in sales?