Below Are Three Relationships That Are Important to the Determination $=$

Below are three relationships that are important to the determination of profitability. Assume assets were $22,900,000 on Dec. 31, 2008.
1. Operating leverage $=$ $\frac{\text { Earnings before interest but after taxes }}{\text { Average assets. }}$

2. Financial structure leverage $=$ $\frac{\text { Net income available to common shareholders }}{\text { Earnings before interest but after taxes }}$


3. $\mathrm { ROCE } = \mathrm { ROA } ^ { \prime }$ Common earnings leverage 'Financial structure leverage
REQUIRED:
Compute the operating leverage, financial structure leverage, and ROCE (rounded to two places). Then use these relationships to analyze how the profitability of X-Mart changed over the three year period below. What does the company need to do to reverse this trend? What are the risks of your strategy?
$\begin{array}{|l|l|l|l|}\hline\text { As of Dec. } 31 & 2009&2010&2011\\\hline \text { ROA } & 0.10 &0.10&0.08\\\hline \text { Assets } & \$ 27,500,000&\$23,000,000&27,600,000 \\\hline \text { Net income available to common shareholders } & \$ 67,250,000 &\$68,960,210&\$70,910,840\\\hline \text { Earrings after taxes but before interest } & \$ 25,000,000&\$24,541,000&\$24,794,000 \\\hline\end{array}$

Correct Answer:

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ROCE has deteriorated somewhat over the ...

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