Question

Required information

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		278,080,000
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

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

APPLE

ROIC ---%

Tax Efficieny ---%

Tax Rate ---%

Operating Profit Margin ---%

COGS/Rev ---%

R&D/Rev ---%

S&GA/Rev ---%

Capital Effieciency ---%

Working Capital Turn ---

Fixed Asset Turn ----

Inventory Turn ----

Receivable Turn ----

Payables Turn ----

Answer 1

Let me help you with this question based on accounting ratios :

We will calculate each ratio for Apple Inc step by step :

Let us first write down the details given in the question in a condensed way, I have also mentioned how we are arriving at a particular figure :

Apple Inc Income Statement FYE Sept, 27 2014 (000) A Net sales 18,27,95,000 -11,22,58,000 Cost of sales B 7,05,37,000 Gross margin (A-B) ID Research & development expense 60,41,000 1,19,93,000 1,80,34,000 E Selling, general & admin expense F Total operating expenses (D+E) H Operating margin (C-F) 5,25,03,000 | Interest & dividend income 17,95,000 J Interest expense -3,84,000 Other Income / Expense 4,31,000 9,80,000 K L Total Other income (-J-K) M Earnings before taxes (H+L) 5,34,83,000 Provision for taxes 1,39,73,000 IN o Net income (loss) (m-n) 3,95,10,000

        Apple Inc
   Income Statement   FYE Sept, 27 2014 (000)
A   Net sales                                            18,27,95,000
B   Cost of sales   -                                 11,22,58,000
C   Gross margin (A-B)                               7,05,37,000
D   Research & development expense        60,41,000
E   Selling, general & admin expense       1,19,93,000
F   Total operating expenses (D+E)            1,80,34,000
      
H   Operating margin (C-F)                       5,25,03,000
I   Interest & dividend income   17,95,000
J   Interest expense                                  -3,84,000
K   Other Income / Expense                     -4,31,000
L   Total Other income (I-J-K)                   9,80,000
M   Earnings before taxes (H+L)               5,34,83,000
N   Provision for taxes                            -1,39,73,000
O   Net income (loss) (m-n)                     3,95,10,000

Now let us calculate ratios :

1. ROIC =    =   (Net Income – Dividend) / (Debt + Equity)

Net income (loss)                                3,95,10,000
Total liabilities + shareholders equity       23,18,39,000
ROIC =        17%

2. Operating Profit Margin     =   Operating Profit / Total Revenue

Operating margin (C-F)             5,25,03,000
Net sales                                 18,27,95,000
Operating Profit Margin          29%

3. COGS/Rev %     =   Cost of Goods Sold / Total Revenue

Cost of sales      11,22,58,000
Net sales           18,27,95,000
COGS/Rev %     61%

4. R&D/Rev ---%   =   R&D Cost / Total Revenue

Research & development expense    60,41,000
Net sales         18,27,95,000
R&D/Rev ---%                                           3%

5. Fixed Asset Turn ----   =   Net Revenue / Fixed Assets

Fixed Assets: PP&E (net)   1,25,22,000
Net sales   18,27,95,000
Fixed Asset Turn %   7%

I hope the solution is clear to you now...based on this you can calculate other ratios as well. Answered the parts as per policy. If you have any doubts or queries, happy to help :)

All the best !!

Happy Studying !!