Question

5.22. Compute ROA, Profit Margin and Asset Turnover for Competitors Selected balance sheet and income statement information from Urban Outfitters, Inc. and TJX Companies, clothing retailers in the high-end and value-priced segments, respectively, follows. 2014 Earnings 2014 Without Interest 2014 Total 2013 Total Company ($ millions) Sales Expense (EWI) Assets Assets Urban Outfitters ....... ....... $ 3,323 $ 232.4 $ 1,889 $ 2,221 TJX Companies ... ........ 29,078 2,241.0 11,128 10,201 a. Compute the 2014 return on assets (ROA) for both companies. b. Disaggregate ROA into profit margin (PM) and asset turnover (AT) for each company. Confirm that ROA = PM X AT. c. Discuss differences observed with respect to PM and AT and interpret these differences in light of each company's business model.

Answer 1

	Company	2014 Sales	2014 EWI	Total Assets 2014	Total Assets 2013	Average Total Assets
	Urban Outfitters	$           3,323.00	$          232.40	$        1,889.00	$       2,221.00	$       2,055.00
	TJX Companies	$        29,078.00	$      2,241.00	$     11,128.00	$     10,201.00	$     10,664.50
		Urban Outfitters	TJX Companies
a]	ROA = EWI/Average total assets =	11.31%	21.01%
b]	Profit margin [PM] = EWI/Sales =	6.99%	7.71%
	Asset turnover [AT] = Sales/Avg. Total Assets =	1.62	2.73
	ROA = PM*AT	11.31%	21.01%
c]	TJX has considerably higher ROA which, is due
	to its having higher AT. Higher AT can magnify
	PM in terms of return on assets.
	Though companies have similar ROA, with
	TJX having slightly higher PM, the ROA of TJX
	gets magnified more due to its higher AT.
	This highlights the strategy of TJX which, aims
	at achieving higher ROA through higher PM.