Adjusting for Negative Equity

Phillip Morris reported the following information in its $2018$ Form $10-$K$.$

$ millions Dec. $31,2018$ Dec. $31,2017$

Stockholders' $($Deficit$)$ Equity

Common stock, no par value $(2,109,316,331$ shares issued in $2018$ and $2017)$ $$0$ $$0$

Additional paid$-$in capital $1,9391,972$

Earnings reinvested in the business $31,01429,859$

Accumulated other comprehensive losses $(10,111)(8,535)$

Total stockholders' equity before treasury stock $22,84223,296$

Less: cost of repurchased stock $(554,736,610$ and $556,098,569$ shares in $2018$

and $2017,$ respectively$)35,30135,382$

Total PMI stockholders' deficit $(12,459)(12,086)$

Noncontrolling interests $1,7201,856$

Total stockholders' deficit $(10,739)(10,230)$

Net earnings $$8,286$

Net earnings attributable to noncontrolling interests $375$

Net earnings attributable to PMI $$7,911$

a$.$ Compute ROE for $2018$ using the equity numbers as reported.

Note: $1.$ Select the appropriate numerator and denominator used to compute ROE from the drop$-$down menu options. $2.$ Enter the numerator and denominator amounts to compute ROE.

Numerator Denominator ROE

Answer $1$

Net earnings attributable to PMI

Answer $2$

Average PMI stockholders' deficit

Answer $3$

$11,225$

Answer $4$

$(17,180\mathrm{.}5)$

$(65\mathrm{.}34)$

How do you interpret this ratio? Answer $5$

Ratio is not intepretable

b$.$ Add back treasury shares to adjust for the company$$s negative equity. Recompute ROE for $2018.$

Numerator Denominator ROE

Answer $6$

Net earnings attributable to PMI

Answer $7$

Average PMI stockholders' deficit

Answer $8$

$11,225$

Answer $9$

$32,297\mathrm{.}5$

$34\mathrm{.}76$

Does the adjusted ratio better captures the company$$s performance during $2018?$ Answer $10$

YesAdjusting for Negathe Equity

Phillip Morris reported the following information in its $2018$ Form $10-K.$

a$.$ Compute ROE for $2018$ using the equity numbers as reported.

Note: $1.$ Select the appropriate numerator and denominator used to compute ROE from the drop$-$down menu options. $2.$ Enter the numerator and denominator amounts to compute ROE.

How do you interpret this ratio?

b$.$ Add back treasury shares to adjust for the company's negative equity. Recompute ROE for $2018.$

Does the adjusted ratio better captures the companys performance during $2018?$

Yes $$