Question

Calculate Return on equity (ROE), Return on assets (ROA), Net Profit Margin (NPM), Debt ratio, and Total assets turnover for 2018 and 2019. Explain why ROE is lower in 2019 than in 2018 (explain in terms of each ratio in DuPont equation for ROE).

Income Statements ($ in millions)			Balance Sheets ($ in millions)
	2018	2019	Assets	2018	2019
Sales Revenue	$2,580	$2,865	Cash	$70	$50
Less: Cost of goods sold	$1,060	$1,500	Short-Term investments	$35	$9
Less: Operating Expenses	$105	$162	Accounts rec.	400	460
Less: Depreciation	$85	$80	Inventory	490	556
Earnings before interest and taxes	$1,330	$1,123	Total Current Assets	$995	$1,075
Less: Interest paid	$350	$380	Net fixed assets	1890	1,910
Taxable Income	$980	$743
Less: Taxes (40%)	$392	$297	Total assets	$2,885	2,985
Net income	$588	$446	Liabilities and Owner's Equity
Dividends (45%)	$265	$201		2015	2016
Additions to Retained Earnings	$323	$245	Accounts payable	$240	$210
			Accruals	$20	$20
			Notes payable	65	74
			Total Current Liabilities	$325	$304
			Long-term debt	884	1090
			Total Liabilities	$1,209	$1,394
			Common stock	1341	1011
			Retained earnings	335	$580
			Total Equity	1676	$1,591
			Total liab.& equity	$2,885	$2,985

Answer 1

2018 2019   

ROE = NET INCOME/SALES* SALES/TOTAL ASSETS*TOTAL ASSETS/AVE SH EQUITY

= 588/2580* 2580/2885*2885/1676 0.35

=446/2865*2865/2985*2985/1634(AVE) 0.27

ROA

NET INCOME/TOTAL ASSETS =588/2885= 0.20

= 446/2985= 0.15

NET PROFIT MARGIN =NET INCOME/REVENUE=588/2580*100 22.79%

=446/2865*100 15.57%

DEBT RATIO=TOTAL DEBT/TOTAL ASSETS=1209/2885 0.42

=1394/2985 0.47

ASSET TURNOVER NET SALES/TOTAL ASSETS=2580/2885 0.89

=2865/2985 0.96

ROE for 2019 is less compared to 2018. net income has fallen by 24.14% compared to 2018 this is seen from the net profit margin of 15.57% in 2019 compared to 22.79% in 2018, ROA is also lower in 2019 compared to 2018

DEBT EQUITY RATIO =total debt/total equity= 1209/1676 0.72

= 1394/1591 0.88

debt equity ratio of 2018 is better than 2019 on account of lower debt in 2018