Question

Return on Equity shows how efficiently the management of a company puts capital to work to generate a return. Also, ROE is the basis for the sustainable growth of the company. This ratio can be broken down into many different parts. Look closely at Profit Margin, Asset Turnover, and Leverage. What are these numbers for Best Buy? What do they tell you?

Answer 1

ANSWER

ROE=PM*ATO*EM

ROE=Return on equity--net income measured against the total equity employed, common stock + retained earnings

PM=Profit Margin-- net income expressed as a % of revenues--- what is left over after meeting all costs/expenses , including tax

ATO=Total Assets turnover--ie. $ sales generated per $ of total assets employed--indicates efficiency in the usage of assets

EM= equity Mutiplier/Leverage --indicates what portion of the assets are funded by equity financing --so, its complement(the balance) is debt funding of assets

The relevant figures from Best Buy's 10K for the fiscal ending, Feb.3,2018 are analysed as under:

Net Income/Av.Total Equity=(Net Income/Revenue)*(Revenue/Av.Total assets)*(Av Total Assets/Av. Total equity)

1000/((4709+3612)/2)=(1000/42151)*(42151/((13856+13049)/2))*((13856+13049)/2)/((4709+3612)/2))

24.04%= 2.37%*3.13*3.23

Following points can be deciphered from the above calculations:

PM---Net income is 2.37% of the revenues generated

ATO---$ 1 of total assets employed generate $ 3.13 sales, ie. More than 3 times

EM---Total assets are more than 3 times the equity,meaning they are funded nearly 70% by debt---ie. More of debt funding.

In toto, ROE is 24% approx.

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