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 Microsoft’s. The income statement and balance sheet are provided for both firms. While the ROIC calculation for Microsoft 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 Microsoft’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 Microsoft. Where does Apple have an advantage? Where does Microsoft have an advantage?

	Apple Inc		Microsoft Corporation
Income Statement	FYE Sept, 27 2014 (000)		FYE June 30 2015 (000)
Net sales	182,795,000		93,580,000
Cost of sales	112,258,000		33,038,000
Gross margin		70,537,000		60,542,000
Research & development expense	6,041,000		12,046,000
Selling, general & admin expense	11,993,000		20,324,000
Total operating expenses			10,011,000
Operating expenses		18,034,000		42,381,000
Operating margin		52,503,000		18,161,000
Interest & dividend income	1,795,000		766,000
Interest expense	384,000		781,000
Other Income / Expense	-431,000		361,000
Total Other income		980,000		346,000
Earnings before taxes		53,483,000		18,507,000
Provision for taxes	13,973,000		6,314,000
Net income (loss)		39,510,000		12,193,000

	Apple Inc		Microsoft Corporation
Balance sheet	FYE Sept, 27 2014 (000)		FYE June 30 2015 (000)
Cash & cash equivalents	13,844,000		5,595,000
Short-term marketable securities	11,233,000		90,931,000
Accounts receivable	17,460,000		17,908,000
Components	471,000		1,100,000
Finished goods	1,640,000		1,600,000
Inventories	2,111,000		2,902,000
Other Current Assets	21,772,000		4,676,000
Total current assets		68,531,000		124,712,000
	130,162,000		12,053,000
Long-term marketable securities	20,624,000		14,731,000
Fixed Assets: PP&E (net)	12,522,000		24,727,000
Other assets		163,308,000		51,511,000
Long term assets		231,839,000		176,223,000
Total assets	30,196,000		6,591,000
Accounts payable	33,252,000		43,267,000
Other Current liabilities		63,448,000		49,858,000
Total current liabilities	28,987,000
Long-term debt	3,031,000		278,080,00
Deferred revenue - non-current	20,259,000		2,095,000
Deferred tax liabilities	4,567,000		2,835,000
Other non-current liabilities			13,544,000
Long Term liabilities		56,844,000		46,282,000
Total liabilities		120,292,000		96,140,000
Common stock	23,313,000		68,465,000
Retained earnings	87,152,000		9,096,000
Unrecognized gain on securities	1,082,000		2,522,000
Total shareholders' equity		111,547,000		80,083,000
Total liabilities + shareholders equity		231,839,000		176,223,000

References

Refresher SFALearning Objective: 05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.Learning Objective: 05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

Calculate the Apple’s ROIC and supporting ratios. (Enter your responses rounded to two decimal places.)

ROIC		%
Tax Efficiency		%
Tax Rate		%
Operating Profit Margin		%
COGS/Rev		%
R&D/Rev		%
S&GA/Rev		%
Capital Efficiency
Working Capital Turn
Fixed Asset Turn
Inventory Turn
Receivable Turn
Payables Turn

2 decimal places required.

Answer 1

Operating margin	52,503,000		18,161,000
Total shareholders' equity	111,547,000		80,083,000
Long-term debt	28,987,000		27,808,000
Total Capital	140,534,000		107,891,000
ROIC	37.36%		16.83%
Earnings before taxes	53,483,000		18,507,000
Net income (loss)	39,510,000		12,193,000
Tax Efficiency	73.87%		65.88%
Tax Rate	26.13%		34.12%
Operating margin	52,503,000		18,161,000
Net sales	182,795,000		93,580,000
Operating Profit Margin	28.72%		19.41%
Cost of sales	112,258,000		33,038,000
Net sales	182,795,000		93,580,000
COGS/Rev	61.41%		35.30%
Research & development expense	6,041,000		12,046,000
Net sales	182,795,000		93,580,000
R&D/Rev	3.30%		12.87%
Selling, general & admin expense	11,993,000		20,324,000
Net sales	182,795,000		93,580,000
S&GA/Rev	6.56%		21.72%
EBIT	0		0
Total shareholders' equity	111,547,000		80,083,000
Long-term debt	28,987,000		27,808,000
Total Capital	140,534,000		107,891,000
Capital Efficiency	0.00%		0.00%
Net sales	182,795,000		93,580,000
Total current assets	68,531,000		124,712,000
Total current liabilities	63,448,000		49,858,000
Workig Capital	5,083,000		74,854,000
Working Capital Turn	35.96		1.25
Net sales	182,795,000		93,580,000
Fixed Assets: PP&E (net)	20,624,000		14,731,000
Fixed Asset Turn	8.86		6.35
Net sales	182,795,000		93,580,000
Inventories	2,111,000		2,902,000
Inventory Turn	86.59		32.25
Net sales	182,795,000		93,580,000
Accounts receivable	17,460,000		17,908,000
Receivable Turn	10.47		5.23
Net sales	182,795,000		93,580,000
Accounts payable	30,196,000		6,591,000
Payables Turn	6.05		14.20