Module 3 1 Profitability Analysis and PROBLEMS 6 Analysis and Interpretation of

Question

Module 3 1 Profitability Analysis and PROBLEMS 6 Analysis and Interpretation of Profitability Balance sheets and income statements for 3M Company follow. LO4, Consolidated Statements of Income Years Ended Dec. 31 (S millions) 2015 2014 2013 Net sales Operating expenses 31,821$30,871 16,106 6,384 1,715 Cost of sales Selling, general and administrative expenses Research, development and related expenses 15,383 6.182 1,763 1,770 Total operating expenses. Operating income Interest expense and income 23.328 24688 24205 7.135 6,666 Interest expense.- Interest income 149 142 145 109 104 6,562 1,841 4,721 123 Income before income taxes Provision for income taxes.... 7,026 2,028 1,982 Net income including noncontrolling interest. Less: Net income attributable to noncontrolling interest Net income attributable to 3M 4,841 S 4.833 $ 4,956 S 4,659 Balance Sheets t December 31 (S millions, except per share amount 2014 Current assets Cash and cash equivalents Marketable securities-cument 1,798 1,897 1,439 118 4,154 4,238 Inventories 1,723 1,655 1,008 855 3,518 ,398 10,986 Work in process Raw materials and supplies. 3,706 1,023 Total Inventories Other current assets Total current assets. 12,303 15 102 Investments Property, plant and equipment. Less: Accumulated depreciation ..(14,583) (14,352) 8,489 7,050 1,435 46 1,769 Property, plant and equipment-net. 9,249 2,601 188 1,053 $32,718 $31,209

Explanation / Answer

a) NOPAT = Operating Profit or EBIT * (1 - Tax)

= 6946 * (1-0.37)

= $ 4,375.98

b) Operating assets will comprise of = Total Current Assets + Net PPE + Good will + Intangible Assets

Operating Liabilities will compris of = Current Liabilities

As per this logic, the Operating assests and operating liabilities for 2015 and 2014 are

NOA 2015 = 31351 - 7118 = $ 24,233

NOA 2014 = 29277 - 5964 = $ 23,313

c) Return on Net Operating Assets (RNOA) = Operating Income / Avg NOA of 2015 and 2014

= 6946 / 23773

= 0.2922

Net Operating Profit Margin (NOPM) = Operating Profit / Net Sales

= 6946 / 30274

= 0.2294

Net Operating Asset Turnover (NOAT) = Net Sales / Avg. net operating Asset

= 30274 / 23733

= 1.2756

Now, NOPM * NOAT

= 0.2294 * 1.2756

= 0.2926

= RNOA

d) The Net non operating obligations comprises of = Long Term Debt + Pension benefits + Other Liabilities - Investments - Prepaid Pension Liabilities - Other Assets

For 2015, NNO = $ 12,486

For 2014, NNO = $ 10,171

For 2015, Total Equity = 11,747

NNO + Total Equity = 12486 + 11747 = 24,233 = NOA

For 2014, Total Equity = 13,142

NNO + Total Equity = 10,171 + 13,142 = 23,313 = NOA

e) ROE = Net income / Total Equity

= 4841/11747

= 0.4121

f) Non operating income was the interest income which was a net loss of 123 and tax provision of 1982 and non controlling interest income of 8

Non Operating component of ROE = (8-123-1982) /11747 = - 0.1785

g) The RNOA is 0.2922 and the return on equity is 0.4121 but with a net non operating compoent of -0.1785 so effectively is 0.2336. this means that the commpany is converting it's operating assets to returns much more favourably than non operating assets. The assumption of Tax as a non operating income has a huge consideration in this

2015 2014 Operating Assets $ 31,351 $ 29,277 Operating Liabilities $ 7,118 $ 5,964

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