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Exercise 8 - Calculating and Comparing Return on Invested Capital (ROIC) Apple v. Blackberry

Return on Invested Capital (ROIC) is a profitability ratio that measures how effective the firm is at generating a return for investors who have provided capital (bondholders and stockholders). The ROIC calculation answers three questions: How tax efficient is the firm? How effective are the firm’s operations? How intensively does the firm use capital? Comparing the answers to these questions between firms can help you understand why one firm is more profitable than another and where that profitability is coming from.

In the following, Apple’s ROIC is compared to Blackberry’s. The income statement and balance sheet are provided for both firms. While the ROIC calculation for Blackberry is completed below, you have to complete the calculation for Apple by supplying the correct income statement and balance sheet information. As you fill in this information, the components of Apple’s ROIC will be calculated along with some supporting ratios. Use these subcomponents and supporting ratios to compare Apple and Blacberry’s performance. Where does Apple’s advantage come from?

This activity demonstrates the calculation of ROIC and the comparison of firm performance, supporting Learning Objective 5-1 and 5-2.

Instructions

Use the income statement and balance sheet information for Apple to fill in the missing items in the calculation of Apple’s ROIC and supporting ratios. Once filled in correctly, compare Apple’s performance to that of Blackberry. Where does Apple have an advantage? Where does Blackberry have an advantage?
Apple, Inc. YE Sept 2012 156,508 87,846 Blackberry YE Mar 2012 18,423 11,848 Income Statement Net sales Cost of sales Gross margin Research & development expense Selling, general & admin expense other operating Total operating expenses Operating margin 68,662 6,575 3,381 10,040 1,559 2,600 930 13,421 55,241 5,089 1,486 Interest&dividend income Interest expense Other Income / Expense Total Other income Earnings before taxes 522 21 522 55,763 21 1,507 Provision for taxes 14,030 354 Net income (loss) 41,733 1,153

We need help calculating ROIC, Capital Efficiency, Working Capital Turn, Inventory Turn, Receivable Turn, and Payables Turn.

Answer 1

	Ratios
				Apple		Microsoft
1-	ROIC	net incom/(Debt + equity)	41733/(19312+118210)	30.35%	1153/(242+10100)	11.15%
2-	Capital efficiency ratio	operating margin/(Debt + equity)	55241/(19312+118210)	40.17%	1486/(242+10100)	14.37%
3-	Working capital turnover	net sales/net working capital	156508/19021	8.23	18423/3682	5.00
	working capital	total of current assets-total of current liabilities	57563-38542	19021.00	7071-3389	3682.00
4-	Inventory turnover	cost of goods sold/average inventory	87846/791	111.06	11848/1207	9.82
	receivable turnover	net sales/average accounts receivables	156508/10930	14.32	18423/3062	6.02
	payable turnover ratio	cost of goods sold/average payable	87846/21175	4.15	11848/744	15.92