Question

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%

Answer 1

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%