Question

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 forBlackberry 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 87846 Blackberry Income Statement YE Mar 2012 Net sales 18,423 11,848 Cost of sales Gross margin Research & development expense Selling, general & admin expense other operating Total operating expenses Operating margin 68,662 3,381 6,575 1559 2,600 0,040 930 5,089 55,241 486 Interest& dividend income Interest expense 522 21 Other Income/Expense 522 21 Total Other income Earnings before taxes 55,763 1,507 14,030 354 Provision for taxes 41,733 1153 Net income (loss) Microsoft Corporation YEMar 30 2012 YE Sept 2012 Accounts receivable t Assets expenses Deferred revenue non-current t liabilities liabilities m liabilities Unrecognized gain on securities Total liabilities+shareholders equity Calculate of Apple's ROIC and supporting ratios. (Enter your responses rounded to two decimal places.) Answer is complete but not entirely correct. APPLE ROIC 30.35 74.84 % Tax Efficiency Tax Rate 25.16 % Operating Profit 35.30. % COGSVRev 56.13 R&D/Rev 2.16 S&GA/Rev 6.42 % Capital Efficiency 137,522.00 Working Capital Turn 19,111.00 Fixed Asset Turn 10.13 Inventory Turn 197.86 14.32 Payables Turn 1.97

Answer 1

Apple's ROIC AND SUPPORTING RATIOS:
RATIO	FORMULA	CALCULATION	RESULT
ROIC   %	Net of tax OI/Invested Book value	55241 *100 * (1 - 0.2516)/176064	23.48
Capital Efficiency   times	EBIT/Capital employed	55241/176064	0.31
Working Capital Turnover   times	Sales/working capital	156508/(57653-38542)	8.19
Fixed Asset Turnover   times	Sales/Fixed assets	156508/15452	10.13
Inventory Turnover   times	COGS/Inventory	87846/791	111.06
Receivable Turnover   times	Sales/Receivables	156508/10930	14.32
Payables Turnover   times	COGS/Payables	87846/21175	4.15