Question

The March 29, 2012, edition of the Wall Street Journal Online contains an article by Miguel Bustillo entitled, “Best Buy Forced to Rethink Big Box.” The article explains how the 1,100 giant stores, which enabled Best Buy to obtain its position as the largest retailer of electronics, are now reducing the company’s profitability and even threatening its survival. The problem is that many customers go to Best Buy stores to see items but then buy them for less from online retailers. As a result, Best Buy recently announced that it would close 50 stores and switch to smaller stores. However, some analysts think that these changes are not big enough.

Suppose the following data were extracted from the 2022 and 2017 annual reports of Best Buy.

	2022	2021	2017	2016
Total assets at year-end	17849	18302	11864	10294
Net Sales	50272		30848
Net Income	1277		1140

Instructions Using the data above, answer the following questions.

a. How might the return on assets and asset turnover of Best Buy diff er from an online retailer?

b. Compute the profit margin, asset turnover, and return on assets for 2022 and 2017.

c. Present the ratios calculated in part (b) in the equation format shown in Illustration 9.22.

d. Discuss the implications of the ratios calculated in parts (b) and (c).

Answer 1

a

Return on assets (ROA) is a financial ratio that can help you analyze the profitability of a company. ROA measures the amount of profit a company generates as a percentage relative to its total assets.

.The return on assets of Best Buy differ fom an online retailer because For Online retailer the sales will increase as customer is more in online retailer this will impact the Income that is income will increase thus ROA will increase which is good sign for business growth for online retailer

.The asset turnover ratio measures the value of a company's sales or revenues relative to the value of its assets. The asset turnover ratio can be used as an indicator of the efficiency with which a company is using its assets to generate revenue.

Asset turnover of Best Buy differ from an online retailer because For Online retailer the sales will increase as customer is more in online retailer.This will increase Assest Turnover Ratio which is good sign for business growth for online retailer

b. Return on assets ratio of Best Buy -.

Return on assets (ROA) is a financial ratio that can help you analyze the profitability of a company. ROA measures the amount of profit a company generates as a percentage relative to its total assets.

Particulars	2022	2021	2017	2016
Total assets at year-end	17849	18302	11864	10294

For year 2022 - Beginning Assets + Ending Assets​Total Sales​)/2=(17849+18302)/2

=18076 For year 2022

For year 2017- Beginning Assets + Ending Assets​Total Sales​)/2=(11864+10294)/2

=11079 For year 2017

ROA=Net Income/Beginning Assets + Ending Assets​Total Sales​)/2

	Particulars	2022	2017
a	Total assets at year-end	18076	11079
b	Net Income	1277	1140
b/a*100	ROA	7.06%	10.29%

Asset turnover of Best Buy

The asset turnover ratio measures the value of a company's sales or revenues relative to the value of its assets. The asset turnover ratio can be used as an indicator of the efficiency with which a company is using its assets to generate revenue.

​Asset Turnover=Total sales/((Beginning Assets + Ending Assets​Total Sales​)/2)

​

	Particulars	2022	2017
a	Beginning Assets + Ending Assets​Total Sales​)/2	18076	11079
b	Net Sales	50272	30848
b/a	Assets Turnover ratio	2.78	2.78

Profit margin is one of the commonly used profitability ratios to gauge the degree to which a company or a business activity makes money. It represents what percentage of sales has turned into profits

Profit Margin = (Net Income/Net Sales) * 100

	Particulars	2022	2017
a	Net Sales	50272	30848
b	Net Income	1277	1140
(b/a)*100	Profit margin	2.54%	3.70%

c. Ratios calculated in part (b) in the equation format

ROA=Net Income/((Beginning Assets + Ending Assets​Total Sales​)/2)

​Asset Turnover=Total sales/((Beginning Assets + Ending Assets​Total Sales​)/2)

Profit Margin = (Net Income/Net Sales) * 100

d. implications of the ratios-

ROA-

This ratio indicates how well a company is performing by comparing the profit (net income) it’s generating to the capital it’s invested in assets. The higher the return, the more productive and efficient management is in utilizing economic resources

ROA is decreasing from year 2017 to year 2022 this implies that Best Buy is facing issue in utilizing economic resources efficiently.

Asset turnover ratios-

Best buy has same  asset turnover ratios 2.78 for both year 2017 and 2022 Since the company have large asset bases, it is expected that they would slowly turn over their assets through sales.

Profit Margin

A good profit margin very much depends on your industry and expansion goals and a host of other factors, like the economy.Here, Profit margin is decreasing from year 2017 3.70% to yaer 2022 2.54%. It means that Best Buy is reducing it profit and thus business growth and goal is impacted adversly from that.

Thus, Best Buy should take necessary steps to Increase profit margin and ROA and Assets turnover ratio for enchancing growth and goals of business and sustain in market.