Question

Problem 1

James Reiter has recently applied for the position of administrator of Winter Park Rehabilitation and Nursing Home Inc. and has been invited for an interview. Because James wants to be well prepared for the interview, he compiled the following 2018 financial data for Winter Park Rehabilitation and Nursing Home Inc. with the intent of performing a rough financial condition analysis.

Total revenue	$20,264,268
Net income	$1,215,856
Total assets	$13,509,512
Total liability	$6,004,228

Also, he identified the following industry average data:

Total margin	5.2%
Total asset turnover	1.4
Equity multiplier	2.3
Return on equity	?

Using Du Pont analysis, what judgement should James make about Winter Park Rehabilitation and Nursing Home’s financial condition? Please show your work.

Answer 1

Using Du Pont analysis, Industry ROE = Total margin x total assets turnover ratio x equity multiplier

Therefore, Industry ROE = 5.20% x 1.4 x 2.3 = 16.74%

Equity of Winter Park Rehabilitation and Nursing Home Inc. = total assets - total liabilities = $13,509,512 - $6,004,228

Equity of Winter Park Rehabilitation and Nursing Home Inc. = total assets - total liabilities = $ 7,505,284

Winter Park Rehabilitation and Nursing Home Inc. = Net income / Equity = $1,215,856 / $7,505,284 = 16.20%

ROE of Winter Park Rehabilitation and Nursing Home Inc is less than industry average of 16.74%