Question

P4-42. Compute the DuPont Disaggregation of ROE Refer to the balance sheets and income statement below for Under Armour Inc. UNDER ARMOUR INC. Consolidated Statements of Income For 12 Months Ended ($ in 000s) Dec. 31, 2015 M Net revenues ................................ Cost of goods sold ......... Gross profit.. Selling, general and administrative expenses ....... Income from operations ........ Interest expense, net ....... Other expense, net..................................................... Income before income taxes........... Provision for income taxes............... Net income.... o n o polduOHS. ............ ........................... $3,963,313 2,057,766 1,905,547 1,497,000 408,547 (14,628) (7,234) 386,685 154,112 $ 232,573 UNDER ARMOUR INC. Consolidated Balance Sheet $ in 000s Dec. 31, 2015 Dec. 31, 2014 $ 129,852 433,638 783,031 152,242 . Assets Cash and cash equivalents ........... Accounts receivable, net ...... Inventories ...................... Prepaid expenses and other current assets ...... Deferred income taxes ........ Total current assets ......... Property and equipment, net ... Goodwill..... Intangible assets, net.......... Deferred income taxes ........ Other long-term assets....... Total assets. Liabilities and Stockholders' Equity Accounts payable...... Accrued expenses ........ Current maturities of long term-debt ......... Other current liabilities.. Total current liabilities.... Long-term debt, net of current maturities..... Long-term line of credit, noncurrent.......... Other long-term liabilities. Total liabilities $ 593,175 279,835 536,714 87177 52,498 1,549,399 305,564 123,256 26,230 33,570 57,064 $2,095,083 .. 1,498,763 538,531 585,181 75,686 92,157 78,582 $2,868,900 $ 200,460 192,935 42,000 43,415 478,810 352,000 275,000 94,868 1,200,678 $ 210,432 147,681 28,951 34,563 421,627 255,250 67,906 744,783 Stockholders' equity Additional paid-in capital..... Retained earnings........... Accumulated other comprehensive loss... Total stockholders' equity.............. Total liabilities and stockholders' equity ........ 636,630 1,076,533 (45,013) 1,668,222 $2,868,900 508,350 856,687 (14,808) 1,350,300 $2,095,083 Required a. Compute return on equity (ROE). b. Apply the DuPont disaggregation into return on assets (ROA) and financial leverage. c. Calculate the profitability and productivity components of ROA. d. Confirm the ROA from part a. above with the full DuPont disaggregation: ROE = PM X AT X FL.

Answer 1

a. ROE = (Net Income / Shareholder's Funds or Equity) $\times$ 100

= $232,573 / [($1,668,222 + $1,350,300) / 2]$\times$ 100

  = 15.4%

ROA = (Net Income / Avg. Total Assets) $\times$ 100

= $232,573 / [($2,868,900 + $2,095,083) / 2]$\times$ 100 = 9.37%

Financial Leverage (FL) = Assets / Shareholder's Equity

= [($2,868,900 + $2,095,083) / 2] $\div$ [($1,668,222 + $1,350,300) / 2] = 2.59

Asset turnover = Sales / Assets

= $3,963,313 / [($2,868,900 + $2,095,083) / 2] = 1.01

b. DuPont disaggregation into ROA and Financial Leverage

ROE = ROA $\times$ FL = 9.37% $\times$ 2.59 = 24.26%

c. Profitability and Productivity components of ROA

Profit Margin shows the Profitability of the Company.

Profit Margin = Net Income / Sales = $232,573 / $3,963,313 = 5.86%

Assets Turnover shows productivity of the Company.

Asset turnover = Sales / Assets

= $3,963,313 / [($2,868,900 + $2,095,083) / 2] = 1.01

d. full DuPont disaggregation

ROE = PM $\times$ AT $\times$ FL

5.86% $\times$ 1.01 $\times$ 2.59 = 15.32%