Question

Computing, Analyzing, and Interpreting Return on Equity and Return on AssetsFollowing are summary financial statement data for Nordstrom Inc. for fiscal years ended 2014 through 2016.$ millions 2016 2015 2014Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,095 $13,110 $12,166Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600 720 734Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,698 9,245 8,574Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 871 2,440 2,080Required

a. Compute return on assets and return on equity for fiscal years ended 2015 and 2016 (use average assets and average equity), together with the components of ROA (profit margin and asset turnover). What trends, if any, do we observe?

b. Which component, if any, appears to be driving the change in ROA over this time period?

Answer 1

Nordstorm Inc.
	2014	2015	2016
Sales	12166	13110	14095
Net Income	734	720	600
Total assets	8574	9245	7698
Equity	2080	2440	871

a..	2014	2015	2016
ROA= Net Income/Average Total assets		720/((8574+9245)/2)=	600/((9245+7698)/2)=
		8.08%	7.08%
Return on assets has decreased in 2016

Analysing the Components of ROA
ROA=PM*ATO
ie. ROA=NI/TA=(NI/Sales)*(Sales/TA)
Profit Margin=Net Income/Sales		720/13110=	600/14095=
		5.49%	4.26%
Profit as a % of sales has decresaed.
Asset turnover=Sales/Av.total assets		13110/((8574+9245)/2)=	14095/((9245+7698)/2)=
		1.47	1.66
$ sales generated per $ of average asset employed has increased from 1.47 in 2015 to 1.66
ROA=PM*ATO=		5.49%*1.47=	4.26%*1.66=
		8.08%	7.08%
So, major reason for the decrease in ROA in 2016, is the decreased profit margin,ie.more than proportionate increase in $ operating & other costs , compared to increase in $ sales

ROE= Net Income/Av. Total equity		720/((2080+2440)/2)=	600/((2440+871)/2)=
		31.86%	36.24%
Also, net income as a % of equity has increased in 2016 ,when compared to 2015.
Despite decrease in net income, the equity(ie.denominator) has decreased much more , so that ROE % has increased in 2016.

Financial leverage= Av.total assets/Av. Total equity		((8574+9245)/2)/((2080+2440)/2)=	((9245+7698)/2)/((2440+871)/2)
		3.94	5.12
Shows more than proportionate decrease of equity in the denominator , when compared to decrease in assets in 2016.
Also, more debt-funding assets as Total Assets=Debt+Equity.

Summing up,
As per DuPont equation
ROE=PM*ATO*FL		5.49%*1.47*3.94=	4.26%*1.66*5.12=
		31.86%	36.24%

b.
Concluding from the above,
the driving factor for decreased ROA in 2016
is the decreased net profit margin in that year