Analysis and Interpretation of Profitability Balance sheets and income statement

Question

Analysis and Interpretation of Profitability

Balance sheets and income statements for Costco Wholesale Corporation follow:

a. Compute net operating profit after tax (NOPAT) for 2013. Assume that the combined federal and state statutory tax rate is 37%.

b. Compute net operating assets (NOA) for 2013 and 2012.

c. Compute and disaggregate Costco’s RNOA into net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2013; confirm that RNOA = NOPM * NOAT. Comment on NOPM and NOAT estimates for Costco in comparison to those for Wal-Mart NOPM = 4.06% and NOAT = 3.73.

d. Compute net operating obligations (NNO) for 2013 and 2012. Confirm the relation: NOA = NNO + Stockholders’ equity (ROE) for 2013.

e. Compute return on equity (ROE) for 2013.             

f. Infer the non-operating return component of ROE for 2013.

g. Comment on the difference between ROE and RNOA. What does this relation suggest about Costco’s use of equity capital?

Explanation / Answer

(a) NOPAT = EBIT - Tax = 3053*(1-0.37) = 1,923

(b)

(e) Return on Equity for 2013 = Net Income / Share holder stake =2039/10833 = 18.82%

(f) Non operating component in the above calculation is (97-99) = $2 i.e. (0.02%)

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