Goals for Sales and Return on Assets
The president of Blue Skies Corp. and his vice presidents are reviewing the operating results of the year just completed. Sales increased by 15% from the previous year to $60,000,000. Average total assets for the year were $40,000,000. Net income, after adding back interest expense, net of tax, was $5,000,000.
The president is happy with the performance over the past year but is never satisfied with the status quo. He has set two specific goals for next year: (1) a 20% growth in sales and (2) a return on assets of 15%.
To achieve the second goal, the president has stated his intention to increase the total asset base by 12.5% over the base for the year just completed.
Required
1. For the year just completed, compute the following ratios:
a. Return on sales
b. Asset turnover
c. Return on assets
2. Compute the necessary asset turnover for next year to achieve the president's goal of a 20% increase in sales.
3. Calculate the income needed next year to achieve the goal of a 15% return on total assets.
(Note: Assume that income is defined as net income plus interest, net of tax.)
4. Based on your answers to parts (2) and (3), comment on the reasonableness of the presi- dent's goals. On what must the company focus to attain these goals?