Financial Reporting Financial Statement Analysis and Valuati

Financial Reporting, Financial Statement Analysis, and Valuation: A STRATEGIC PERSPECTIVE 9e

4.15 Analyzing Operating Profitability. Exhibit 4.22 presents selected operat- ing data for three retailers for a recent year. Macy\'s operates several department store chains selling consumer products such as brand-name clothing, china, cosmetics, and bedding and has a large presence in the bridal and formalwear markets (under store names Macy\'s and Bloomingdale\'s). Home Depot sells a wide range of building materials and home improve- ment products, which includes lumber and tools, riding lawn mowers, lighting fixtures, and Exhibit 4.22 Selected Data for Three Retailers (amounts in millions) (Problem 4.15) Macy\'s Home Depot Supervalu Sales Cost of goods sold Interest expense Net income Average inventory Average fixed assets Average total assetso Loarning All 24,967svyntb744up19 333le or $24,892 15,009 588 (4,803) 4,915 10,717 $44,564 34,451 633 (2,855) 2,743 7,531 $71,288 47,298 624 2,260 11,202 26,855 canned, or duplicat

Solution

(a)

Formula to be used :

ROA = [Net Income + (Interest Expense net of taxes)] ÷ Average Total Assets

ROA = Profit Margin for ROA x Assets Turnover

Profit Margin for ROA = [Net Income + (Interest Expense net of taxes)] ÷ Sales

Assets Turnover = sales ÷ Average Total Assets

Now we will calculate ROA:

Macy’s ROA      = [-4803 + 588 x (1-0.35)] ÷ 24967

= -17.71%

Disaggregation of ROA:

Macy’s Profit margin      = [-4803 + 588 x (1-0.35)] ÷ 24892

= -17.76%

Macy’s Assets Turnover            = 24892 ÷ 24967

= 0.997

Home Depot’s ROA       = [2260 + 624 x (1-0.35)] ÷ 42744

= 6.24%

Disaggregation of ROA:

Home Depot’s Profit margin       = [2260 + 624 x (1-0.35)] ÷ 71288

= 3.74%

Home Depot’s Assets Turnover             = 71288 ÷ 42744

= 1.668

Supervalu’s ROA           = [-2855 + 633 x (1-0.35)] ÷ 19333

= -12.64%

Disaggregation of ROA:

Supervalu’s Profit margin             = [-2855 + 633 x (1-0.35)] ÷ 44564

= -5.48%

Supervalu’s Assets Turnover     = 44564 ÷ 19333

= 2.305

(b) Likely reason for difference in profit margins of three retail stores is difference in their operating expenses, likely reason for difference in assets turnover is difference in investment of fixed assets and their inventory requirement.