Question

Use the following tables to complete the critical thinking assignment.

Best Buy Co., Inc.

Income Statement

	2/3/2018	1/28/2017	1/30/2016	1/31/2015
Revenue
Total Revenue	42,151,000	39,403,000	39,528,000	40,339,000
Cost of Revenue	32,275,000	29,963,000	30,334,000	31,292,000
Gross Profit	9,876,000	9,440,000	9,194,000	9,047,000
Operating Expenses
Selling General and Administrative	7,911,000	7,493,000	7,612,000	7,550,000
Operating Income or Loss	1,965,000	1,947,000	1,582,000	1,497,000
Income from Continuing Operations
Add Total Other Income/Expenses Net	-148,000	-131,000	-272,000	-110,000
Interest Expense	75,000	72,000	80,000	90,000
Income Before Tax	1,742,000	1,744,000	1,230,000	1,297,000
Income Tax Expense	818,000	609,000	503,000	141,000
Add Discontinued Operations	1,000	21,000	90,000	-13,000
Net Income	925,000	1,156,000	817,000	1,143,000

Best Buy Co., Inc.

Balance Sheet

	2/3/2018	1/28/2017	1/30/2016	1/31/2015
Current Assets
Cash And Cash Equivalents	1,101,000	2,240,000	1,976,000	2,432,000
Short Term Investments	2,196,000	1,848,000	1,384,000	1,539,000
Net Receivables	1,049,000	1,347,000	1,162,000	1,280,000
Inventory	5,209,000	4,864,000	5,051,000	5,174,000
Other Current Assets	274,000	217,000	313,000	1,047,000
Total Current Assets	9,829,000	10,516,000	9,886,000	11,472,000
Long Term Investments	0	13,000	27,000	3,000
Property Plant and Equipment	2,421,000	2,293,000	2,346,000	2,295,000
Goodwill	425,000	425,000	425,000	425,000
Intangible Assets	18,000	18,000	18,000	57,000
Other Assets	356,000	591,000	817,000	993,000
Deferred Long Term Asset Charges	159,000	317,000	510,000	574,000
Total Assets	13,049,000	13,856,000	13,519,000	15,245,000
Current Liabilities
Accounts Payable	4,873,000	4,984,000	4,450,000	5,030,000
Short/Current Long Term Debt	499,000	0	350,000	0
Other Current Liabilities	1,043,000	944,000	975,000	1,609,000
Total Current Liabilities	7,817,000	7,122,000	6,925,000	7,777,000
Long Term Debt	648,000	1,158,000	1,168,000	1,492,000
Other Liabilities	805,000	704,000	877,000	901,000
Total Liabilities	9,437,000	9,147,000	9,141,000	10,250,000
Stockholders' Equity
Total Stockholder Equity	3,612,000	4,709,000	4,378,000	4,995,000

Using the attached financial statements for Best Buy Co., Inc. complete the financial statement analysis and ratio analysis by answering the questions below.

a. Calculate the return on assets (ROA) for Best Buy Co., Inc. using the DuPont System of Analysis over the past four years.

b. Discuss the overall ROA result, along with each of the components.

c. Calculate the return on equity (ROE) for Best Buy Co., Inc. using the Modified DuPont System of Analysis over the past four years.

d. Discuss the overall ROE result, along with each of the components.

e. Provide a summary of your findings over the four years.

Answer 1

ROA = Net Profit Margin x Asset Turnover ratio

ROE = Net Profit Margin x Asset Turnover ratio x Equity Multiplier

Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. The cell highlighted in yellow contains your answer. Part(a) and (c) have been answered inline. Rest of the answers are there after the table. Figures in parenthesis, if any, mean negative values. All financials are in $.

Income Statement	Linkage
		2/3/2018	1/28/2017	1/30/2016	1/31/2015
Revenue	A
Total Revenue		42,151,000	39,403,000	39,528,000	40,339,000
Cost of Revenue		32,275,000	29,963,000	30,334,000	31,292,000
Gross Profit		9,876,000	9,440,000	9,194,000	9,047,000
Operating Expenses
Selling General and Administrative		7,911,000	7,493,000	7,612,000	7,550,000
Operating Income or Loss		1,965,000	1,947,000	1,582,000	1,497,000
Income from Continuing Operations
Add Total Other Income/Expenses Net		-148,000	-131,000	-272,000	-110,000
Interest Expense		75,000	72,000	80,000	90,000
Income Before Tax		1,742,000	1,744,000	1,230,000	1,297,000
Income Tax Expense		818,000	609,000	503,000	141,000
Add Discontinued Operations		1,000	21,000	90,000	-13,000
Net Income	B	925,000	1,156,000	817,000	1,143,000
Best Buy Co., Inc.
Balance Sheet
		2/3/2018	1/28/2017	1/30/2016	1/31/2015
Current Assets
Cash And Cash Equivalents		1,101,000	2,240,000	1,976,000	2,432,000
Short Term Investments		2,196,000	1,848,000	1,384,000	1,539,000
Net Receivables		1,049,000	1,347,000	1,162,000	1,280,000
Inventory		5,209,000	4,864,000	5,051,000	5,174,000
Other Current Assets		274,000	217,000	313,000	1,047,000
Total Current Assets		9,829,000	10,516,000	9,886,000	11,472,000
Long Term Investments		0	13,000	27,000	3,000
Property Plant and Equipment		2,421,000	2,293,000	2,346,000	2,295,000
Goodwill		425,000	425,000	425,000	425,000
Intangible Assets		18,000	18,000	18,000	57,000
Other Assets		356,000	591,000	817,000	993,000
Deferred Long Term Asset Charges		159,000	317,000	510,000	574,000
Total Assets	C	13,049,000	13,856,000	13,519,000	15,245,000
Current Liabilities
Accounts Payable		4,873,000	4,984,000	4,450,000	5,030,000
Short/Current Long Term Debt		499,000	0	350,000	0
Other Current Liabilities		1,043,000	944,000	975,000	1,609,000
Total Current Liabilities		7,817,000	7,122,000	6,925,000	7,777,000
Long Term Debt		648,000	1,158,000	1,168,000	1,492,000
Other Liabilities		805,000	704,000	877,000	901,000
Total Liabilities		9,437,000	9,147,000	9,141,000	10,250,000
Stockholders' Equity
Total Stockholder Equity	D	3,612,000	4,709,000	4,378,000	4,995,000
Part (a) ROA using DuPont
Net Profit Margin	P = B / A	2.19%	2.93%	2.07%	2.83%
Asset turnover ratio	Q = A / C	3.23	2.84	2.92	2.65
ROA	P x Q	7.09%	8.34%	6.04%	7.50%
Part (c ) ROE using Dupont
Equity Multiplier	R = C / D	3.61	2.94	3.09	3.05
ROE	P x Q x R	25.61%	24.55%	18.66%	22.88%

Part (b)

Net profit margins have declined marginally over the years. Asset turnover ratio have improved over the years. Both these points point together explains the behavior of ROA. ROA has also declined over a period of time except in the year 2017 when it has the best figure of 8.34%

Part (d)

ROE is significantly better than ROA. This is because ROE incorporates the impact of leverage. Equity multiplier has been on rise over the years. This is because proportion of debt in the capital structure has gone up. Increase in leverage has resulted into an increasing ROE over the years (except 2016 when it was lowest).

Part (e)

Summary of findings:

• The company has a robust revenue growth but it has a very low net profit margin.
• Net profit margins have declined marginally over the years.
• Asset turnover ratio have improved over the years.
• ROA has also declined over a period of time except in the year 2017 when it has the best figure of 8.34%
• ROE is significantly better than ROA.
• Equity multiplier has been on rise over the years as proportion of debt in the capital structure has gone up.
• Increase in leverage has resulted into an increasing ROE over the years (except 2016 when it was lowest).