In this workout, we're going to calculate return on assets, return on equity, and return on tangible equity for 2024 and 2023. We need to assume a 20% marginal tax rate, and we need to make a comment on the results. Below, we've got extracts from the balance sheet and income statement that we need to calculate these ratios.

So we've got total assets, we've got total equity, we've then got goodwill and intangible assets.

Then we've got our income statement numbers, the reported net income, non-recurring expenses.

And then the first thing we need to do is calculate the adjusted net income, because for analysis purposes, we don't want to include one-off non-recurring items.

As these are non-recurring expenses, we need to add them back to the net income, because net income would've been higher if these non-recurring expenses never happened.

But remember that we are working with net income, which is after tax, and so we need to adjust for tax on these non-recurring items as well.

So we're going to start with the reported net income, and then we need to add back the non-recurring expenses, and we need to multiply those by one minus the marginal tax rate, which we've been given above as 20%. I'm just going to lock onto that by pressing F4 so that I can copy my formula to the right.

So after adjusting for the non-recurring expenses and the tax impact of that, we've got the adjusted net income for 2024 of 6649. And if I copy that to the right, we have got the adjusted or cleaned net income figure for both years.

The next thing we need to calculate before we can do the ratios is the tangible equity. Remember, tangible equity is taking the total equity and excluding goodwill and intangible assets.

Now we can calculate our return on assets, return on equity, and return on tangible equity.

These three ratios all use your cleaned or adjusted net income as the numerator, and as the denominator, we're going to use the average balance over the year for either the assets, the equity, or the tangible equity.

Starting with return on assets, we take the adjusted net income and we divide that by the average balance of the total assets at the end of this year and the end of the previous year.

Moving on to return on equity, it's the same numerator, so that adjusted net income, but now we're going to divide by the average balance of total equity.

And finally, for return on tangible equity, it's the same numerator, but we're going to divide by the average balance of tangible equity.

And then let's copy to the right so we have them for the previous year as well.

What comment can we make on this? Well, we can see that all three ratios have declined over the year, and the reason for that is that the adjusted net income has declined year on year, but the total assets balance, the total equity balance, and the tangible equity balance have all increased over the year.

So that explains the reason for the decline in all ratios.

Furthermore, we notice that the return on tangible equity has declined by the most, and the reason for that is that tangible equity increased a lot, and that is due to the intangible assets and goodwill having decreased over the period.

So overall, declining return metrics.

Also note the difference between return on asset and return on equity, how much higher the return on equity is than the return on assets, and that is due to the use of leverage.