In: Finance
Reformulating Financial Analysis for Equity Method Investments
Cummins Inc. reports investments in affiliated companies, consisting mainly of investments in nine manufacturing joint ventures. Cummins reports those investments on its balance sheet at $958 million and provides the following financial information on its investee companies in a footnote to its 10-K report.
Equity Investee Financial Summary | As of and for the years ended Dec. 31 | ||||||
---|---|---|---|---|---|---|---|
$ millions | 2015 | 2014 | 2013 | ||||
Net sales | $5,946 | $7,426 | $7,799 | ||||
Gross margin | 1,265 | 1,539 | 1,719 | ||||
Net income | 521 | 630 | 690 | ||||
Cummins' share of net income | $273 | $330 | $325 | ||||
Royalty and interest income | 42 | 40 | 36 | ||||
Total equity, royalty and interest from investees | $315 | $370 | $361 | ||||
Current assets | $2,458 | $2,476 | |||||
Noncurrent assets | 1,539 | 1,667 | |||||
Current liabilities | (1,796) | (1,875) | |||||
Noncurrent liabilities | (284) | (420) | |||||
Net assets | $1,917 | $1,848 | |||||
Cummins' share of net assets | $958 | $956 |
Make the following assumptions about the above data.
All assets are operating assets.
All current liabilities are operating liabilities.
Non-current liabilities are loans that bear interest at 8%.
EMI (Equity Method Investments) investees’ tax rate is 35%.
The following information is derived from the 2015 form 10-K for Cummins Inc., the investor company.
$ millions |
2015 |
---|---|
Revenue | $19,110 |
Net operating profit after tax (NOPAT) | 1,420 |
Net nonoperating expense (NNE) | 21 |
Net income attributable to Cummins Inc. | 1,399 |
Net operating assets (NOA) | 7,578 |
Net nonoperating obligations (NNO) | (172) |
Equity of Cummins Inc. shareholders | 7,406 |
a. Compute net operating profit after tax (NOPAT) for the EMI investees.
Round to the nearest whole number.
$Answer million
b. Compute net operating assets (NOA) and net nonoperating obligations (NNO) for the EMI investees.
NOA $Answer
million
NNO $Answer
million
c. Following the process in Analyst Adjustments box 9.1, reformulate the following ratios for Cummins for 2015. For simplicity only, use year-end balance sheet numbers provided instead of averages.
First, compute the adjusted balances.
Income Statement | Adjusted Balances | Balance Sheet | Adjusted Balances |
---|---|---|---|
Revenue | $Answer | NOA | $Answer |
NOPAT | Answer | NNO | Answer |
Net nonoperating expense | Answer | Equity | Answer |
Net income | Answer |
Next, compute the following ratios: 1. using Cummins' figures (unadjusted) and 2. using the adjusted balances as computed above.
Round RNOA, NOPM, and ROE to one decimal place (ex: 0.2345 =23.5%)
Round NOAT and FLEV to two decimal places.
Use negative signs with answers, when appropriate.
Unadjusted | Adjusted | |
---|---|---|
RNOA | Answer% | Answer% |
NOPM | Answer% | Answer% |
ROE | Answer% | Answer% |
NOAT | Answer | Answer |
FLEV | Answer | Answer |