Question

Use the following selected balance sheet and income statement data for Mattel Inc. (in $ thousands) to compute a) return on equity, b) profit margin (PM), c) asset turnover (AT), and d) financial leverage (FL) for fiscal 2013. Show that ROE = PM × AT × FL.

(in thousands)	2013	2012
Net sales	$6,484,892	$6,420,881
Operating income	1,168,103	1,021,015
Interest expense	5,555	6,841
Net income	903,944	776,464
Total assets	6,439,626	6,526,785
Total liabilities	3,188,067	3,459,741

Answer 1

Answer :-

a) Return on Equity (ROE)= Net Income / Average Stockholders' Equity

Net Income for 2013 = $903,944

Now we first find out the Stockholders' Equity.

Total Assets = Total liabilities + Stockholders' Equity

Therefore, Stockholders' Equity = Total Assets - Total liabilities

	2013	2012
Total assets	$6,439,626	$6,526,785
Less :- Total liabilities	$3,188,067	$3,459,741
Stockholders' Equity	$3,251,559	$3,067,044

Average Shareholders Equity = ( Shareholders Equity of 2013 + Shareholders Equity of 2012) /2

Average Shareholders Equity = ( $3,251,559 + $3,067,044) / 2

Average Shareholders Equity = $3,159,301.5

Return on Equity = $903,944/ $3,159,301.5

Return on Equity = 0.2861 or 28.61%

b) Profit Margin (PM) = Net Income / Net Sales

Net Income for 2013 = $ 903,944

Net Sales = $6,484,892

Profit Margin = $903,944 / $6,484,892

Profit Margin = 0.1394 or 13.94%

c) Asset Turnover (AT)= Net Sales / Average Assets

Net sales = $ 6,484,892

Average Assets = ( Total Assets of 2013 + Total Assets of 2012)/2

Average assets = ( $6,439,626 + $6,526,785 )/2

Average Assets = $6,483,205.5

Asset Turnover = $6,484,892 / $6,483,205.5

Asset Turnover = 1.00

d) Financial leverage (FL)= Average Assets / Average Stockholders' Equity

Average Assets = $6,483,205.5

Average Stockholders' Equity = $3,159,301.5

Financial leverage = $6,483,205.5 / $3,159,301.5

Financial leverage = 2.0521

.

As ROE = PM × AT × FL

=> 28.61% = 13.94% × 1.00 × 2.0521

=> 28.61% = 28.61%

Thus , ROE = PM × AT × FL.