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 companys financial performance and position.

Income Statement					Balance Sheet
HEALTHYME Inc.					HEALTHYME Inc.
Year ended Dec 31, 2020					As at Dec 31, 2020
	2020	2019				2020	2019
	in $ '000	in $ '000				in $ '000	in $ '000
Sales	3400	3900			Assets
Cost of goods sold	-2080	-2430			Cash	120	170
Gross Profit	1320	1470			Accounts receivable	880	760
Selling, General and Administrative Expenses	-760	-750			Inventories	1010	830
Depreciation Expense	-200	-180			Total current assets	2010	1760
Operating Income	360	540			Property, plant and equipment	5830	5630
Interest Expense	-180	-160			Accumulated depreciation	-1040	-840
Earnings before tax	180	380			Total assets	6800	6550
Income tax expense	-100	-115
Net income	80	265			Liabilities and Shareholder's Equity
NOPAT was 252 in 2020 and 378 in 2019.					Accounts Payable	580	500
					Short-term borrowings	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 the 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 transactions effects should be considered independently. (10 marks)

	Transaction	Ratio	Effect (Increase, decrease, no effect)
a	Repaid a bank loan of $75,000	Debt-to-assets ratio
b	The company expensed supplies of $5,000 which were recorded as a current asset	Gross margin
c	Purchased equipment worth $250,000 on credit	Leverage ratio
d	Paid wages for the previous month in arrears	Return on equity
e	Received a deposit from a customer of $10,000 for a project that will commence in the next financial period.	Current ratio