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Analysis and Interpretation of Profitability Balance sheets and income statements for Best Buy Co., Inc. follow....

Analysis and Interpretation of Profitability
Balance sheets and income statements for Best Buy Co., Inc. follow.

Consolidated Statements of Earnings
For Fiscal Years Ended ($ millions) February 26, 2011 February 27, 2010 February 28, 2009
Revenue $ 50,272 $ 49,694 $ 45,015
Cost of goods sold 37,611 37,534 34,017
Restructuring charges - cost of goods sold 24 -- --
Gross Profit 12,637 12,160 10,998
Selling, general and administrative expenses 10,325 9,873 8,984
Restructuring charges 198 52 78
Goodwill and tradename impairment -- -- 66
Operating income 2,114 2,235 1,870
Other income (expense)
Investment income and other 51 54 35
Investment impairment -- -- (111)
Interest expense (87) (94) (94)
Earnings before income tax expense and equity in income of affiliates 2,078 2,195 1,700
Income tax expense 174 802 674
Equity in income of affiliates 2 1 7
Net earnings including noncontrolling interest 1,366 1,394 1,033
Net income attributable to noncontrolling interest (89) (77) (30)
Net income attributable to Best Buy Co., Inc. $ 1,277 $ 1,317 $ 1,003
Consolidated Balance Sheets
($ millions, except footnotes) February 26, 2011 February 27, 2010
Assets
Current assets
Cash and cash equivalents $ 1,103 $ 1,826
Short-term investments 22 90
Receivables 2,348 2,020
Merchandise inventories 5,897 5,486
Other current assets 1,103 1,144
Total current assets 10,473 10,566
Property and equipment
Land and buildings 766 757
Leasehold improvements 2,318 2,154
Fixtures and equipment 4,701 4,447
Property under capital lease 120 95
7,905 7,453
Less: Accumulated depreciation 4,082 3,383
Property and equipment, net 3,823 4,070
Goodwill 2,454 2,452
Tradenames, net 133 159
Customer relationships, net 203 279
Equity and other investments 328 324
Other noncurrent assets 435 452
Total assets $ 17,849 $ 18,302
Liabilities and equity
Current liabilities
Accounts payable $ 4,894 $ 5,276
Unredeemed gift card liabilities 474 463
Accrued compensation and related expenses 570 544
Accrued liabilities 1,471 1,681
Accrued income taxes 256 316
Short-term debt 557 663
Current portion of long-term debt 441 35
Total current liabilities 8,663 8,978
Long-term liabilities 1,183 1,256
Long-term debt 711 1,104
Equity
Best Buy Co., Inc. Shareholders' equity
Preferred stock, $1.00 par value -- --
Common stock, $0.10 par value 39 42
Additional paid-in capital 18 441
Retained earnings 6,372 5,797
Accumulated other comprehensive income (loss) 173 40
Total Best Buy Co., Inc. shareholders' equity 6,602 6,320
Noncontrolling interest 690 644
Total equity 7,292 6,964
Total liabilities and equity $ 17,849 $ 18,302


NOTE: Use net income attributable to controlling interests in your computations, when applicable.

a. Compute ROE for 2011.

Do not round until your final answer. Round answer to two decimal places.

ROE =Answer%  


b. Confirm that ROE equals ROE computed using the component measures for profit margin, asset turnover, and financial leverage using: ROE = PM * AT * FL.

   Compute the components of ROE.

   Do not round until your final answer. Round answer to two decimal places.

  PM = Answer%
   AT = Answer
   FL = Answer
  

c. Compute adjusted ROA. Assume a tax rate of: 37.0%.

Round answer to two decimal places.  
Adjusted ROA =Answer%

Solutions

Expert Solution

a.
Return on equity is the return earned on the shareholder's equity
Formula to calculate ROE
ROE = Net income applicable to equity shareholder's/Average Shareholder's equity
Calculation of ROE
ROE = 1,277/((6,602+6,320)/2)
ROE 1277/6461
ROE 19.76%
The return on equity for 2011 is 19.76%
b.
Formula to calculate profit margin
Profit margin = Net Income/Sales
Profit margin = 1,277/50,272
Profit margin 2.54%
Formula to calculate asset turnover
Asset turnover = Sales/Average total assets
Asset turnover = 50,272/((17,849+18,302)/2)
Asset turnover = 50272/18075.50
Asset turnover 2.78
Formula to calculate financial leverage
Financial leverage = Average assets/Average stockholder's equity
Financial leverage = 18075.50/6461
Financial leverage 2.80
PM 2.54%
AT 2.78
FL 2.80
PM*AT*FL
2.54%*2.78*2.80
19.76%
Hence, ROE = PM*AT*FL
c.
Formula to calculate adjusted ROA
Adjusted ROA = [Net income + Interest*(1-tax)]/Average assets
Adjusted ROA = [1,277 + (87-51)*(1-0.37)]/18075.50
Adjusted ROA = [1,277 + 22.68]/18075.50
Adjusted ROA = 7.19%
Adjusted ROA is 7.19%

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