Analysis and Interpretation of Profitability

Balance sheets and income statements for Costco Wholesale Corporation follow.

Costco Wholesale Corporation
Consolidated Statements of Earnings
For Fiscal Years Ended ($ millions)	September 2, 2018
Total revenue	$142,750
Operating expenses
Merchandise costs	124,326
Selling, general and administrative	13,876
Preopening expenses	1,242
Operating Income	3,306
Other (income) expense
Interest expense	159
Interest income and other, net	(121)
Income before income taxes	3,268
Provision for income taxes	1,263
Net income including noncontrolling interests	2,005
Net income attributable to noncontrolling interests	(45)
Net income attributable to Costco	$1,960

Costco Wholesale Corporation
Consolidated Balance Sheets
($ millions, except par value and share data)	September 2, 2018	September 3, 2017
Current assets
Cash and cash equivalents	$6,055	$5,720
Short-term investments	2,378	1,233
Receivables, net	1,669	1,432
Merchandise inventories	11,040	11,008
Other current assets	1,495	272
Total current assets	22,637	19,665
Net property and equipment	20,855	18,161
Other assets	860	869
Total assets	$44,352	$38,695
Current liabilities
Accounts payable	$11,237	$9,608
Accrued salaries and benefits	2,994	3,877
Accrued member rewards	1,057	2,135
Deferred membership fees	2,798	1,498
Other current liabilities	3,014	2,725
Total current liabilities	21,100	19,843
Long-term debt	7,661	7,747
Other liabilities	2,488	1,200
Total liabilities	31,249	28,790
Equity
Preferred stock, $0.01 par value:	0	0
Common stock, $0.01 par value:	4	4
Additional paid-in-capital	6,107	4,626
Accumulated other comprehensive loss	(1,199)	(1,014)
Retained earnings	7,887	5,988
Total Costco stockholders equity	12,799	9,604
Noncontrolling interests	304	301
Total equity	13,103	9,905
Total liabilities and equity	$44,352	$38,695
Combined federal and state statutory tax rate	22%

(a) Compute net operating profit after tax (NOPAT) for 2018. Assume that the combined federal and state statutory tax rate is 22%.

	NOPAT
	Answer

(b) Compute net operating assets (NOA) for 2018 and 2017.

	Year	NOA
	2018	Answer
	2017	Answer

(c) Compute Costcos RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2018.

	Numerator	Denominator	RNOA
	AnswerTotal revenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)	AnswerTotal revenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)
	Answer	Answer

	Numerator	Denominator	NOPM
	AnswerTotal revenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)	AnswerTotal revenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)
	Answer	Answer

	Numerator	Denominator	NOAT
	AnswerTotal revenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)	AnswerTotal revenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)
	Answer	Answer

(d) Compute net nonoperating obligations (NNO) for 2018 and 2017. Confirm the relation: NOA = NNO + Total equity.

	Year	NNO
	2018	Answer
	2017	Answer

	Year	NNO	Total equity	NOA
	2018	Answer	Answer
	2017	Answer	Answer

(e) Compute return on equity (ROE) for 2018.

	Numerator	Denominator	ROE
	AnswerTotal revenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)	AnswerTotal revenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)
	Answer	Answer

(f) Infer the nonoperating return component of ROE for 2018.

	ROE	RNOA	Nonoperating component of ROE
	Answer	Answer