Question: Financial Statement Analysis (25 Marks)
The financial statements for HEALTHELIXIR Inc. are provided below for the financial years
ending 2020 and 2019.
Income Statement
HEALTHELIXIR Ltd.
Year ended Dec 31, 2020
Sales
Cost of goods sold
Gross Profit
Selling, General and Administrative Expenses
Depreciation Expense
Operating Income
Interest Expense
Earnings before tax
Income tax expense
2020
in $
'000
3100
(1798)
1302
(590)
(140)
572
(100)
472
(142)
2019
in $
'000
2760
(1573)
1187
(510)
(120)
557
(500)
57
(17)
330
40
Net income
NOPAT was 400 in 2020 and 390 in 2019.
Balance Sheet
HEALTHELIXIR Ltd.
As at Dec 31, 2020
2020
in $
'000
2019
in $
'000
Assets
Cash
Accounts receivable
Inventories
Total current assets
Property, plant and equipment
Accumulated depreciation
Total assets
40
460
460
960
4860
(660)
5160
76
360
300
736
3720
(520)
3936
Liabilities and Shareholder's Equity
Accounts Payable
Short-term borrowings
Salaries payable
Total current liabilities
Long-term borrowings
Total liabilities
Share capital, (at $1 per share)
Retained earnings
Total shareholder's equity
Total Liabilities and Shareholder's Equity
350
100
150
600
1000
1600
2800
760
3560
5160
300
70
130
500
500
1000
2500
436
2936
3936
Financial Statement Analysis (16 marks)
1. You observe that return on equity has changed from 2019 to 2020. You want to analyse
the reasons for the change in return on equity to evaluate whether you should invest in
the stock. Drawing on your knowledge of Du Pont Analysis, calculate the return on
equity and its drivers for 2019 and 2020. (12 marks)
2. Discuss what these numbers indicate to you as a potential investor. You should briefly
indicate in your answer which of your calculations is the primary driver behind the
change in ROE (We recommend a maximum of 50 words). (4 marks)
Impact of Transaction on Ratios (9 marks)
The below information relates to Drake Ltd which manufactures and sells commercial
kitchen equipment. The company is constantly profitable. Drake Ltd’s financial
statement ratios are as follows:
Profit Margin
15%
Current Ratio
2.2 times
Debt to Equity Ratio
0.8 times
For each of the following transactions or events, indicate the directional effect (increase,
decrease, no change) on the Profit Margin, Current Ratio and Debt to Equity in the table
below. Note that you must write either ‘increase’, ‘decrease’ or ‘no change’. A blank
response will be marked as incorrect. Consider each transaction independently of all the
other transactions.
a. Drake Ltd borrowed an additional $200,000 as short-term, 6-month loan from the
bank. (3 marks)
b. Sold obsolete inventory purchased for $75,000 for $50,000 cash (3 marks)
c. Paid $100,000 dividends to shareholders (previously declared) (3 marks)