Question

Financial Ratios. Look again at Table 28.8 from P. 3., which gives abbreviated balance sheets and income statements for Walmart. Assume Walmart had a 35% marginal corporate tax rate in 2017. Calculate the following using balance sheet figures from the start of the year:

1. Return on assets.

2. Operating profit margin.

3. Sales-to-assets ratio.

4. Inventory turnover.

5. Debt-equity ratio.

	Fiscal 2017	Fiscal 2016
Income Statement
Net Sales Cost of goods sold Selling, general, and administrative expenses Depreciation Earnings before interest & tax Interest expense Taxable income Tax Net Income	$500,343   373,396     95,981     10,529 $ 20,437       2,178 $ 18,259       4,600 $ 13,659	$485,873   361,256     91,773     10,080 $ 22,764       2,267 $ 20.497       6,204 $ 14,293

	Fiscal 2017	Fiscal 2016
Balance Sheet
Assets Current assets:       Cash and marketable securities      Accounts receivable      Inventories      Other current assets      Total current assets	$6,756   5,614 43,783   3,511 $59,664	$6,867   5,835 43,046   1,941 $57,689
Fixed assets:      Net fixed assets      Other long-term assets           Total assets	$114,818    30,040 $204,522	$114,178    26,825 $198,825
Liabilities & Shareholders’ Equity Current liabilities:      Accounts payable      Other current liabilities           Total current liabilities Long-term debt Other long-term liability           Total liabilities           Total shareholders’ equity           Total liabilities and shareholders’ equity	$46,092   32,429 $78,521   36,825   11,307 $126,653 77,869 $204,522	$41,433   25,495 $66,928   42,018   12,081 $121,027 77,798 $198,825

Answer 1

A)

Return on Assets= EBIT(1 - T) / Total Assets

where T is tax rate and EBIT is earning before interest and tax

Total Assets = Net Fixed Assets + Current Assets

= 114 818 + 59664

= 174482

EBIT= 20437

tax rate = 35%

ROA = 20437(1 - 0.35) / 174482

0.0761 or 7.61%

Similarly for year 2016 = 22764(1 - 0.35) / (57689 + 114178) = 14797/171867

0.08609 or 8.61%

RoA

2017 = 7.61%

2016 = 8.61%

Analysis - The RoA has declined in 2017 as assets increased in 2017 (due to inventory) more than EBIT.

B)

Operating profit margin = EBIT / Sales

2017 = 20437 / 500343 = 4.08 %

2016 = 22764 / 485873 = 4.68 %

Analysis : Operating profit margin in 2017 decreased in 2017 as EBIT declined more than increases in sales.

C)

Sales To Asset = Sales / Total Assets

2017 = 500343 / 174482 = 2.86 %

2016= 485873 / 171867 = 2.82 %

Analysis : Sales to Asset increased in 2017 as Sales increased more than increase in Total Assets.

D)

Inventory Turnover = Cost of goods Sold / Average Inventory or Inventory

2017 = 373396 / 43783 = 8.52 times

2016= 361256 / 43046 = 8.39 times

Analysis: In 2017 the co. is rotating inventory in more time  than in 2016.

E) Debt/Equity = Total Debt / Capital Employed

Capital Employed= Total Assets

2017 = 36825 / 174482 = 0.21

2016= 42018 / 171867 = 0.24

Analysis: Debt/Equity ratio decreased in 2017 due to payment of long term debt.