Having worked for AUDITFIX for a while, you started to invest some of your salary into the stock market. You had invested into a supplements and lifestyle company called HEALTHYME Inc. You are reconsidering your investment portfolio and strategy. The annual report of HEALTHYME Inc. has just been released and you start looking through the income statement, balance sheet and cash flow statement for the fiscal year 2020. You start analyzing the company's financial performance and position. Income Statement HEALTHYME Inc. Year ended Dec 31, 2020 2020 2019 Sales Cost of goods sold Gross Profit Selling, General and Administrative Expenses Depreciation Expense Operating Income Interest Expense Earnings before tax Income tax expense Net income NOPAT was 252 in 2020 and 378 in 2019. Balance Sheet HEALTHYME Inc. As at Dec 31, 2020 Assets Cash Accounts receivable Inventories Total current assets Property, plant and equipment Accumulated depreciation Total assets Liabilities and Shareholder's Equity Accounts Payable Short-term borrowings in $ '000 3400 3900 (2080) (2430) 1320 1470 (760) (750) (200) (180) 360 540 (180) (160) 180 380 (100) (115) 80 265 2019 2020 in $ '000 in $ '000 120 880 1010 2010 5830 (1040) in $ '000 170 760 830 1760 5630 (840) 6800 6550 580 500 250 200 Salaries payable 250 200 Total current liabilities 1080 900 Long-term borrowings 1500 1500 Total liabilities 2580 2400 Share capital, (at $1 per share) 2800 2800 Retained earnings 1420 1350 Total shareholder's equity 4220 4150 Total Liabilities and Shareholder's Equity 6800 6550 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. 1. Calculate the return on equity and its drivers for 2019 and 2020. (8 marks) 2. Discuss what these numbers indicate to you as a current investor. (4 marks) 3. Provide three limitations of this analysis. (3 marks) 4. You are worried HEALTHYME may have accidentally forgot to record some transactions during the year. For each of the follow transactions, indicate whether the given ratio would have increased, decreased, or not changed if HEALTHYME had recorded the listed transaction. Each transaction's effects should be considered independently. (10 marks) Transaction Ratio Repaid a bank loan of $75,000 Debt-to-assets ratio Gross margin The company expensed supplies of $5,000 which were recorded as a current asset Purchased equipment worth $250,000 on credit Paid wages for the previous month in arrears Received a deposit from a customer of $10,000 for a project that will commence in the next financial period Leverage ratio Return on equity Current ratio 1 2 3 4 5 Having worked for AUDITFIX for a while, you started to invest some of your salary into the stock market. You had invested into a supplements and lifestyle company called HEALTHYME Inc. You are reconsidering your investment portfolio and strategy. The annual report of HEALTHYME Inc. has just been released and you start looking through the income statement, balance sheet and cash flow statement for the fiscal year 2020. You start analyzing the company's financial performance and position. Income Statement HEALTHYME Inc. Year ended Dec 31, 2020 2020 2019 Sales Cost of goods sold Gross Profit Selling, General and Administrative Expenses Depreciation Expense Operating Income Interest Expense Earnings before tax Income tax expense Net income NOPAT was 252 in 2020 and 378 in 2019. Balance Sheet HEALTHYME Inc. As at Dec 31, 2020 Assets Cash Accounts receivable Inventories Total current assets Property, plant and equipment Accumulated depreciation Total assets Liabilities and Shareholder's Equity Accounts Payable Short-term borrowings in $ '000 3400 3900 (2080) (2430) 1320 1470 (760) (750) (200) (180) 360 540 (180) (160) 180 380 (100) (115) 80 265 2019 2020 in $ '000 in $ '000 120 880 1010 2010 5830 (1040) in $ '000 170 760 830 1760 5630 (840) 6800 6550 580 500 250 200 Salaries payable 250 200 Total current liabilities 1080 900 Long-term borrowings 1500 1500 Total liabilities 2580 2400 Share capital, (at $1 per share) 2800 2800 Retained earnings 1420 1350 Total shareholder's equity 4220 4150 Total Liabilities and Shareholder's Equity 6800 6550 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. 1. Calculate the return on equity and its drivers for 2019 and 2020. (8 marks) 2. Discuss what these numbers indicate to you as a current investor. (4 marks) 3. Provide three limitations of this analysis. (3 marks) 4. You are worried HEALTHYME may have accidentally forgot to record some transactions during the year. For each of the follow transactions, indicate whether the given ratio would have increased, decreased, or not changed if HEALTHYME had recorded the listed transaction. Each transaction's effects should be considered independently. (10 marks) Transaction Ratio Repaid a bank loan of $75,000 Debt-to-assets ratio Gross margin The company expensed supplies of $5,000 which were recorded as a current asset Purchased equipment worth $250,000 on credit Paid wages for the previous month in arrears Received a deposit from a customer of $10,000 for a project that will commence in the next financial period Leverage ratio Return on equity Current ratio 1 2 3 4 5