Computing, Analyzing, and Interpreting Return on Equity and Return on Assets Fol
ID: 2419060 • Letter: C
Question
Computing, Analyzing, and Interpreting Return on Equity and Return on Assets Following are the summary financial statement data for Kimberly-Clark for 2010-2012.
"Kimberly-Clark Corporation (KMB) ($ millions)
2012 2011 2010"
Sales $21,063 $20,846 $19,746
Net income 1,750 1,591 1,843
Total assets 19,875 19,373 19,864
Equity 4,985 5,249 5,917
Required Compute the return on assets and return on equity for 2011 and 2012 (use average assets and average equity), together with the components of ROA (profit margin and asset turnover). What trends do we observe? Which component appears to be driving the change in ROA over this time period? KMB repurchased a large amount of its common shares in recent years at the cost of almost $4.9 billion. How did this repurchase affect its return on equity?
Explanation / Answer
The trends show a marked improvement in terms of financial performance and efficiency in managing assets.
Both the components have contributed, but it looks like the profit margin has played a larger role as compared to asset turnover in improving the ROA.
The repurchase has reduced the equity base, and ROE is calculated as net income / equity. Therefore, with a smaller number in the denominator, there has been a large improvement in ROE.
2012 2011 2010 Sales 21,063 20,846 19,746 Net income 1,750 1,591 1,843 Total assets 19,875 19,373 19,864 Equity 4,985 5,249 5,917 Average assets 19,624 19,619 - Average equity 5,117 5,583 - Return on assets 8.92% 8.11% Profit margin 8.31% 7.63% Asset turnover 1.073 times 1.063 times Return on equity 34.20% 28.50%Related Questions
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