Question

Return on Invested Capital (ROIC) is a profitability ratio that measures how effective the firm is at generating a return for investors who have provided capital (bondholders and stockholders). The ROIC calculation answers three questions: How tax efficient is the firm? How effective are the firm’s operations? How intensively does the firm use capital? Comparing the answers to these questions between firms can help you understand why one firm is more profitable than another and where that profitability is coming from. In the following, Apple’s ROIC is compared to Microsoft’s. The income statement and balance sheet are provided for both firms. While the ROIC calculation for Microsoft is completed below, you have to complete the calculation for Apple by supplying the correct income statement and balance sheet information. As you fill in this information, the components of Apple’s ROIC will be calculated along with some supporting ratios. Use these subcomponents and supporting ratios to compare Apple and Microsoft’s performance. Where does Apple’s advantage come from? This activity demonstrates the calculation of ROIC and the comparison of firm performance, supporting Learning Objective 5-1 and 5-2. Instructions Use the income statement and balance sheet information for Apple to fill in the missing items in the calculation of Apple’s ROIC and supporting ratios. Once filled in correctly, compare Apple’s performance to that of Microsoft. Where does Apple have an advantage? Where does Microsoft have an advantage? Apple Inc Microsoft Corporation Income Statement FYE Sept, 27 2014 (000) FYE June 30 2015 (000) Net sales 182,795,000 93,580,000 Cost of sales 112,258,000 33,038,000 Gross margin 70,537,000 60,542,000 Research & development expense 6,041,000 12,046,000 Selling, general & admin expense 11,993,000 20,324,000 Total operating expenses 10,011,000 Operating expenses 18,034,000 42,381,000 Operating margin 52,503,000 18,161,000 Interest & dividend income 1,795,000 766,000 Interest expense 384,000 781,000 Other Income / Expense -431,000 361,000 Total Other income 980,000 346,000 Earnings before taxes 53,483,000 18,507,000 Provision for taxes 13,973,000 6,314,000 Net income (loss) 39,510,000 12,193,000 Apple Inc Microsoft Corporation Balance sheet FYE Sept, 27 2014 (000) FYE June 30 2015 (000) Cash & cash equivalents 13,844,000 5,595,000 Short-term marketable securities 11,233,000 90,931,000 Accounts receivable 17,460,000 17,908,000 Components 471,000 1,100,000 Finished goods 1,640,000 1,600,000 Inventories 2,111,000 2,902,000 Other Current Assets 21,772,000 4,676,000 Total current assets 68,531,000 124,712,000 130,162,000 12,053,000 Long-term marketable securities 20,624,000 14,731,000 Fixed Assets: PP&E (net) 12,522,000 24,727,000 Other assets 163,308,000 51,511,000 Long term assets 231,839,000 176,223,000 Total assets 30,196,000 6,591,000 Accounts payable 33,252,000 43,267,000 Other Current liabilities 63,448,000 49,858,000 Total current liabilities 28,987,000 Long-term debt 3,031,000 278,080,00 Deferred revenue - non-current 20,259,000 2,095,000 Deferred tax liabilities 4,567,000 2,835,000 Other non-current liabilities 13,544,000 Long Term liabilities 56,844,000 46,282,000 Total liabilities 120,292,000 96,140,000 Common stock 23,313,000 68,465,000 Retained earnings 87,152,000 9,096,000 Unrecognized gain on securities 1,082,000 2,522,000 Total shareholders' equity 111,547,000 80,083,000 Total liabilities + shareholders equity 231,839,000 176,223,000 References Refresher SFALearning Objective: 05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.Learning Objective: 05-02 Apply shareholder value creation to assess and evaluate competitive advantage. 7.value: 10.00 pointsRequired information Calculate the Apple’s ROIC and supporting ratios. (Enter your responses rounded to two decimal places.)

Income Statement	FYE Sept, 27 2014 (000)		FYE June 30 2015 (000)
Net sales	182,795,000		93,580,000
Cost of sales	112,258,000		33,038,000
Gross margin		70,537,000		60,542,000
Research & development expense	6,041,000		12,046,000
Selling, general & admin expense	11,993,000		20,324,000
Total operating expenses			10,011,000
Operating expenses		18,034,000		42,381,000
Operating margin		52,503,000		18,161,000
Interest & dividend income	1,795,000		766,000
Interest expense	384,000		781,000
Other Income / Expense	-431,000		361,000
Total Other income		980,000		346,000
Earnings before taxes		53,483,000		18,507,000
Provision for taxes	13,973,000		6,314,000
Net income (loss)		39,510,000		12,193,000

	Apple Inc		Microsoft Corporation
Balance sheet	FYE Sept, 27 2014 (000)		FYE June 30 2015 (000)
Cash & cash equivalents	13,844,000		5,595,000
Short-term marketable securities	11,233,000		90,931,000
Accounts receivable	17,460,000		17,908,000
Components	471,000		1,100,000
Finished goods	1,640,000		1,600,000
Inventories	2,111,000		2,902,000
Other Current Assets	21,772,000		4,676,000
Total current assets		68,531,000		124,712,000
	130,162,000		12,053,000
Long-term marketable securities	20,624,000		14,731,000
Fixed Assets: PP&E (net)	12,522,000		24,727,000
Other assets		163,308,000		51,511,000
Long term assets		231,839,000		176,223,000
Total assets	30,196,000		6,591,000
Accounts payable	33,252,000		43,267,000
Other Current liabilities		63,448,000		49,858,000
Total current liabilities	28,987,000
Long-term debt	3,031,000		278,080,00
Deferred revenue - non-current	20,259,000		2,095,000
Deferred tax liabilities	4,567,000		2,835,000
Other non-current liabilities			13,544,000
Long Term liabilities		56,844,000		46,282,000
Total liabilities		120,292,000		96,140,000
Common stock	23,313,000		68,465,000
Retained earnings	87,152,000		9,096,000
Unrecognized gain on securities	1,082,000		2,522,000
Total shareholders' equity		111,547,000		80,083,000
Total liabilities + shareholders equity		231,839,000		176,223,000

References

Refresher SFALearning Objective: 05-01 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.Learning Objective: 05-02 Apply shareholder value creation to assess and evaluate competitive advantage.

7.

value:
10.00 points

Required information

Calculate the Apple’s ROIC and supporting ratios. (Enter your responses rounded to two decimal places.)

Answer 1

Answer:

( all income statement and balance sheet figures are in '000)

Apple's ROIC = Operating margin / capital employed ( Total assets - current liability)

= 52,503,000 / (231,839,000 - 28,987,000) = 25.88%

Supporting ratios:

Operating Profit ratio = Operating margin / Net sales = 52,503,000 / 182,795,000 = 28.72%

Gross profit ratio = Gross Margin / Net sales = 70,537,000 / 182,795,000 = 38.59%

Cost of goods sold ratio = Cost of sales/ Revenue = 112,258,000 / 182,795,000 = 61.41%

Research & development expense ratio = Research & development expense / Net sales

= 6,041,000 / 182,795,000 = 3.30%

Selling, general & admin expense ratio = Selling, general & admin expense / Net sales

= 11,993,000 / 182,795,000 = 6.56%

Efficiency ratios:

Asset turnover ratio = Net sales / Total assets = 182,795,000 / 231,839,000 = 0.79

Inventory Turnover = Cost of goods sold / (Inventory + Finished goods)

= 112,258,000 / (2,111,000 + 1,640,000) = 29.93

Receivable Turnover = Net sales / Receivables = 182,795,000 / 17,460,000 = 10.47