Question

Compute ROE and RNOA with Disaggregation Selected balance sheet and income statement information for Home Depot follows. $ millions Jan. 31, 2016 Feb. 01, 2015 Operating assets $40,583 $38,473 Nonoperating assets 2,241 1,748 Total assets 42,824 40,221 Operating liabilities 15,018 13,527 Nonoperating liabilities 21,285 17,167 Total liabilities 36,303 30,694 Total stockholders' equity 6,521 9,527 Sales 88,999 Net operating profit before tax (NOPBT) 12,024 Nonoperting expense before tax 778 Tax expense 4,088 Net income 7,158 Round answers to two decimal places (ex: 0.12345 = 12.35%) a. Compute return on equity. Answer % b. Compute return on net operating assets (RNOA). Answer % c. Use ROE and RNOA to determine the nonoperating return for the year. Answer % d. Disaggregate RNOA into components of profitability and productivity and show that the product of the two components equals RNOA. NOPM Answer % NOAT Answer RNOA Answer %

Answer 1

a. Return on equity is 89.2%

b.Return on net operating assets (RNOA) is 20.0%

c. nonoperating return for the year is 69.2%

d RNOA is 20.025%

Step-by-step explanation:

$ millions Jan. 31, 2016 Feb. 01, 2015

Operating assets $40,583 $38,473

Nonoperating assets 2,241 1 ,748

Total assets 42,824 40,221

Operating liabilities 15,018 13,527

Nonoperating liabilities 21,285 17,167

Total liabilities 36,303 30,694

Total stockholders' equity 6,521 9,527

Sales 88,999

Net operating profit before tax (NOPBT) 12,024

Nonoperting expense before tax 778

Tax expense 4,088

Net income 7,158

NOPAT = Net operating profit before tax (NOPBT) - Tax expense

= 7936

277822 - 151357

a. Compute return on equity.

ROE = Net income / Average share equity

= 7,158/ ((6,521 + 9,527 )/ 2)

= 7158 / 8024

= 0.892

= 89.2%

b. Compute return on net operating assets (RNOA).

=NOPAT / Average operating asset

= 7936 / ((40583 + 38473)/2)

= 7936 / 39528

= 0.20

= 20 %

c. Use ROE and RNOA to determine the nonoperating return for the year.

=ROE - RONA

= 89.2% - 20%

= 69.2%

d. Disaggregate RNOA into components of profitability and productivity and show that the product of the two components equals RNOA.

NOPM = NOPAT / Sales

= 7936 / 88999

= 0.089

=8.9%

NOAT = Sales / Average operating asset

= 88999 / ((40583 + 38473)/2)

= 88999 / 39528

= 2.25%

RNOA = NOPM x NOAT

= 8.9 x 2.25

= 20.025%