In: Accounting
Comparing Abercrombie & Fitch and TJX
Companies
Following are selected financial statement data from Abercrombie
& Fitch (ANF-upscale clothing retailer) and TJX Companies
(TJX-value-priced clothing retailer including TJ Maxx) -- both
dated the end of January 2008 or 2007.
($ millions) | Company | Total Assets | Net Income | Sales |
---|---|---|---|---|
2007 | TJX Companies Inc. | $6,086 | ||
2008 | TJX Companies Inc. | 6,600 | $ 772 | $18,647 |
2007 | Abercrombie & Fitch | 2,248 | ||
2008 | Abercrombie & Fitch | 2,568 | 476 | 3,750 |
(a) Compute the return on assets for both companies for the year ended January 2008
(b) Disaggregate the ROAs for both companies into the profit margin and asset turnover.
(c) Which of the following is a likely interpretation of the results of your computations for parts a and b?
ANF turns its assets much faster than TJX and this is the primary reason for its higher return on assets.
ANF is realizing a higher return on assets as a result of its lower investment in assets.
ANF's profit margin more than offsets its lower asset turnover, thus generating higher returns on assets.
ANF's higher return on assets is the result of its greater level of sale
Solution a:
Return on Assets - Original Formula | |||||
Particulars | Choose Numerator | / | Choose denomerator | = | Return on Assets |
Formula | Net Income | / | Average Total Assets | = | Return on Assets |
TJX Companies Inc | $772.00 | / | $6,343.00 | = | 12.17% |
Abercrombie & Fitch | $476.00 | / | $2,408.00 | = | 19.77% |
Solution b:
Profit Margin | Profit Margin | ||||||
Division | Choose Numerator | / | Choose denomerator | = | Profit Margin | ||
Details | Amount | Details | Amount | ||||
TJX Companies Inc | Net income | $772.00 | / | Sales | $18,647.00 | = | 4.14% |
Abercrombie & Fitch | Net income | $476.00 | / | Sales | $3,750.00 | = | 12.69% |
Asset Turnover | Turnover | ||||||
Division | Choose Numerator | / | Choose denomerator | = | Asset Turnover | ||
Details | Amount | Details | Amount | ||||
TJX Companies Inc | Sales | $18,647.00 | / | Average Total assets | $6,343.00 | = | 2.94 |
Abercrombie & Fitch | Sales | $3,750.00 | / | Average Total assets | $2,408.00 | = | 1.56 |
Solution c:
The most likely interpretation of the results for computation in Part a and b is "ANF's profit margin more than offsets its lower asset turnover, thus generating higher returns on assets."
Hence 3rd option is correct.