Question

2. Income statements and balance sheets follow for Snap-On Incorporated. Refer to these financial statements to answer the requirements.

Snap-On Incorporated Consolidated Statements of Earnings
(Amounts in millions)		For the fiscal year ended
		2016	2015
Net sales		$ 3,430.4	$ 3,352.8
Cost of goods sold		(1,720.8)	(1,704.5)
Gross profit		1,709.6	1,648.3
Operating expenses		(1,054.1)	(1,053.7)
Operating earnings before financial services		655.5	594.6
Financial services revenue		281.4	240.3
Financial services expenses		(82.7)	(70.1)
Operating income from financial services		198.7	170.2
Operating earnings		854.2	764.8
Interest expense		(52.2)	(51.9)
Other income (expense) -- net		(0.6)	(2.4)
Earnings before income taxes and equity earnings		801.4	710.5
Income tax expense		(244.3)	(221.2)
Earnings before equity earnings		557.1	489.3
Equity earnings, net of tax		2.5	1.3
Net earnings		559.6	490.6
Net earnings attributable to noncontrolling interests		(13.2)	(11.9)
Net earnings attributable to Snap-on Incorporated		$ 546.4	$ 478.7

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Snap-On Incorporated Consolidated Balance Sheets
	Fiscal Year End
(Amounts in millions)	2016	2015
Cash and cash equivalents	$   77.6	$   92.8
Trade and other accounts receivable - net	598.8	562.5
Finance receivables - net	472.5	447.3
Contract receivables - net	88.1	82.1
Inventories - net	530.5	497.8
Deferred income tax assets	0.0	109.9
Prepaid expenses and other assets	116.5	106.3
Total current assets	1,884.0	1,898.7
Property and equipment - net	425.2	413.5
Deferred income tax assets	72.8	106.3
Long-term finance receivables - net	934.5	772.7
Long-term contract receivables - net	286.7	266.6
Goodwill	895.5	790.1
Other intangibles - net	184.6	195.0
Other assets	39.9	44.0
Total assets	4,723.2	4,486.9
Notes payable and current maturities of long-term debt	301.4	18.4
Accounts payable	170.9	148.3
Accrued benefits	52.8	52.1
Accrued compensation	89.8	91.0
Franchisee deposits	66.7	64.4
Other accrued liabilities	307.9	296.3
Total current liabilities	989.5	670.5
Long-term debt	708.8	861.7
Deferred income tax liabilities	13.1	169.8
Retiree health care benefits	36.7	37.9
Pension liabilities	246.5	227.8
Other long-term liabilities	93.4	88.5
Total liabilities	2,088.0	$ 2,056.2
Preferred stock	–	–
Common stock	67.4	$ 67.4
Additional paid-in capital	317.3	296.3
Retained earnings	3,384.9	2,986.9
Accumulated other comprehensive income (loss)	(498.5)	(364.2)
Treasury stock at cost	(653.9)	(573.7)
Total shareholders’ equity attributable to Snap-on Inc.	2,617.2	2,412.7
Noncontrolling interests	18.0	18.0
Total shareholders’ equity	2,635.2	2,430.7
Total liabilities and shareholders’ equity	$ 4,723.2	$ 4,486.9

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Required:

2015. Compute net operating profit after tax (NOPAT) for 2016 and 2015. Assume that combined federal and state statutory tax rates are 37% for fiscal 2016 and 2015.
2016. Compute net operating assets (NOA) for 2016 and 2015.
2017. Compute return on net operating assets (RNOA) for 2016 and 2015. Net operating assets are $3,011.7 million in 2014.
2018. Compute return on equity (ROE) for 2016 and 2015. (Stockholders’ equity attributable to Snap-On in 2014 is $2,207.8 million.)
2019. What is nonoperating return component of ROE for 2016 and 2015?
2020. Comment on the difference between ROE and RNOA. What inference do you draw from this comparison?

Answer 1

Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. The rows highlighted in yellow contain your answer. Figures in parenthesis, if any, mean negative values. All financials are in $ mn. Last part has been answered after the table.

Parameter	Linkage	2016	2015	2014
Operating Income	EBIT	854	765
Tax rate	T	37%	37%
Part (a) NOPAT	EBIT x (1 - T)	538.1	481.8
Total Assets	A	4,723.2	4,486.9
[-]Cash & Cash Equivalent	C	77.6	92.8
Total Operating Assets	OA = A - C	4,645.6	4,394.1
Total Liabilities	L	2,088.0	2,056.2
[-] Notes payable and current maturities of long-term debt	STD	301.4	18.4
[-] Long term debt	LTD	708.8	861.7
Total Operating Liabilities	OL = L - STD - LTD	1,077.8	1,176.1
Part (b) Net Operating Asset (NOA)	NOA = OA - OL	3,567.8	3,218.0	3011.7
Average NOA	Average NOA	3,392.9	3,114.9
Part (c ) Return on Net Operating Assets	RONA = NOPAT / Average NOA	15.86%	15.47%
Total Equity attributable to Snap-on Inc.	E	2,617.2	2,412.7	2,207.8
Average Equity	Average E	2,515.0	2,310.3
Net earnings attributable to Snap-on Inc	NI	546.4	478.7
Part (d) Return on Equity (ROE)	ROE = NI / Average E	21.73%	20.72%
Part (e ) Non operating return component of ROE	ROE - RONA	5.87%	5.25%

The difference between ROE and RNOA is same as Non operating return component of ROE, calculated in the last row of the table above. The difference is positive in both the years implying that:

• The company has higher return on equity than on Net operating assets
• This implies presence of leverage in the firm
• Which in turn means leverage has been beneficial for the firm. The firm had been able to enhance its return by adding leverage.
• Return on operating assets > cost of debt, hence leverage has increased ROE.