Question

Compute, Disaggregate and Interpret ROE and ROA Selected balance sheet and income statement information from Staples, Inc., follows ($ millions). Sales Interest expense Net income Total Assets Stockholders' Equity 2014 2014 2014 2014 2013 2014 2013 $22,492 $49 $135 $10,314 $11,175 $5,313 $6,141 a. Compute the 2014 return on equity (ROE), return on assets (ROA), and return on financial leverage (ROFL). Round answers to one decimal place (i.e., 0.2568 = 25.7%). Do not round until your final answer. ROE ROA ROFL 10.3 % x 4.18 % X 3.07% x b. Disaggregate ROA into profit margin (PM) and asset turnover (AT). Round answers to one decimal place (i.e., 0.2568 = 25.7%). Do not round until your final answer. PM 0% x AT 0x

Please help.

Answer 1

Note: following amounts are in millions

(a)

(1)

Return on equity (ROE) = net income/average stockholders equity

= $135/{($5313 + $6141)/2}

= 2.4%

(2)

Return on assets (ROA) = net income/average total assets

= $135/{($10314 + $11175)/2}

= 1.3%

note: alternatively in computing ROA, numerator is taken as,

Net Income + Interest Expense (1 – tax rate)

(3)

Return on financial leverage (ROFL) = ROE – ROA

= 2.4% - 1.3%

= 1.1%

(b)

ROA = Profit Margin x Asset Turnover = (net income/Revenues) x (Revenues/Average Total Assets)

therefore,

profit margin = $135/$22492 = 0.6%

asset turnover = $22492/{($10314 + $11175)/2} = 2.1 times