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Comparing Operating Characteristics Across Industries Following are selected income statement and balance sheet data for companies...

Comparing Operating Characteristics Across Industries
Following are selected income statement and balance sheet data for companies in different industries.

$ millions Sales Cost of
Goods Sold
Gross Profit Net Income Assets Liabilities Stockholders'
Equity
Target Corp. $73,785 $51,997 $21,788 $3,363 $40,262 $27,305 $12,957
Nike, Inc. 32,376 17,405 14,971 3,760 21,396 9,138 12,258
Harley-Davidson 5,995 3,620 2,375 752 9,991 8,151 1,840
Cisco Systems 49,247 18,287 30,960 10,739 121,652 58,067 63,585


(a) Compute the following ratios for each company.

  • Round all answers to one decimal place (percentage answer example: 0.2345 = 23.5%).
  • Note: The liabilities to stockholders' equity ratio should not be converted into a percentage answer (round answers to one decimal place, for example: 0.452 = 0.5).
    Company Gross Profit / Sales Net Income/ Sales Net Income/ Stockholders' Equity Liabilities/ Stockholders' Equity
    Target Corp. Answer Answer Answer Answer
    Nike, Inc. Answer Answer Answer Answer
    Harley-Davidson Answer Answer Answer Answer
    Cisco Systems Answer Answer Answer Answer


    (b) Which of the following statements about business models best describes the differences in gross (and net) profit margin that we observe?

    The higher gross profit companies are typically those that have some competitive advantage that allows them to charge a market price for their products that cannot be easily competed away.

    The lower gross profit companies are those that can manufacture their products at the lowest cost.

    The higher gross profit companies are those that sell the highest unit volumes.

    The lower gross profit companies are those that charge a higher price for their products.



    (c) Which company reports the highest ratio of net income to equity? AnswerCisco SystemHarley-DavidsonNike Inc.Target Corp.

    Which of the following statements best describes the differences in the ratio of net income to equity that we observe?

    The highest return to equity companies are those that are able to keep their operating costs the lowest.

    The highest return on equity companies are those that maintain high levels of debt and, as a result, reduce their utilization of equity.

    The highest return on equity companies are those that are able to sustain some competitive advantage that leads to higher profitability and are also able to minimize their use of equity.

    The lowest return on equity companies are those that are able to charge high prices for their products and, thus, report the highest gross profit-to-sales ratio.

  • (d) Which company has financed itself with the highest percentage of liabilities to equity? AnswerCisco SystemHarley-DavidsonNike Inc.Target Corp.

    Which of the following statements best describes the reason why some companies are able to take on higher levels of debt than are others?

    Companies that can sustain higher levels of debt generally operate in consumer products industries.

    Companies that can sustain higher levels of debt are typically larger companies.

    Companies that can sustain higher levels of debt are typically those with the most stable and positive cash flows.

    Companies that can sustain higher levels of debt are generally younger companies whose market values are relatively low and, as a result, cannot raise equity capital.

       

Solutions

Expert Solution

(a) Gross profit/Sales:
Target corp. Nike Inc. Harley-Davidson Cisco systems
gross profit a 21788 14971 2375 30960
Sales b 73785 32376 5995 49247
Gross profit/Sales a/b 29.5% 46.2% 39.6% 62.9%
Net income/Sales:
Target corp. Nike Inc. Harley-Davidson Cisco systems
Net income a 3363 3760 752 10739
Sales b 73785 32376 5995 49247
Net income/Sales a/b 4.6% 11.6% 12.5% 21.8%
Net income/Stockholder's equity:
Target corp. Nike Inc. Harley-Davidson Cisco systems
Net income a 3363 3760 752 10739
stockholder's equity b 12957 12258 1840 63585
Net income/Stockholder's equity a/b 26.0% 30.7% 40.9% 16.9%
Liabilities/Stockholder's equity:
Target corp. Nike Inc. Harley-Davidson Cisco systems
Liabilities a 27305 9138 8151 58067
stockholder's equity b 12957 12258 1840 63585
Liabilities/Stockholder's equity a/b 2.1 0.7 4.4 0.9
(b) The higher gross profit companies are typically those that have some competitive advantage that allows them to charge a market price
for their products that cannot be easily competed away
(c ) Harly-davidson reports highest net income to equity (40.9%)
The highest return on equity companies are those that are able to sustain some competitive advantage that leads to higher profitability
and are also able to minimize their use of equity
(d) Harly-davidson reports highest percentage of liabilities to equity (4.4)
Companies that can sustain higher levels of debt are typically those with the most stable and positive cash flows

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