Analysis and Interpretation of Profitability

Balance sheets and income statements for $3$M Company follow.

$3$M COMPANY

Consolidated Statements of Income

For Years ended December $31($$ millions$)20182017$

Net sales $$24,836$ $$23,996$

Operating expenses

Cost of sales $12,64512,170$

Selling, general and administrative expenses $5,7625,023$

Research, development and related expenses $1,8211,870$

Gain on sale of businesses $(547)(586)$

Total operating expenses $19,68118,477$

Operating income $5,1555,519$

Other expense, net$*157109$

Income before income taxes $4,9985,410$

Provision for income taxes $1,2412,031$

Net income including noncontrolling interest $3,7573,379$

Less: Net income attributable to noncontrolling interest $1411$

Net income attributable to $3$M $$3,743$ $$3,368$

$*$Interest expense, gross $$350$ $$322$

$3$M COMPANY

Consolidated Balance Sheets

At December $31($$ millions, except per share amount$)20182017$

Current Assets

Cash and cash equivalents $$2,163$ $$2,314$

Marketable securities $3801,076$

Accounts receivable $3,8053,723$

Total inventories $3,3093,058$

Prepaids $741937$

Other current assets $349266$

Total current assets $10,74711,374$

Property, plant and equipment$-$net $6,6236,720$

Goodwill $7,6197,969$

Intangible assets$-$net $2,0142,225$

Other assets $1,3451,395$

Total assets $$28,348$ $$29,683$

Current liabilities

Short$-$term borrowings and current portion of long$-$term debt $$918$ $$1,405$

Accounts payable $1,7181,474$

Accrued payroll $749870$

Accrued income taxes $243310$

Other current liabilities $2,1032,053$

Total current liabilities $5,7316,112$

Long$-$term debt $10,1669,169$

Pension and postretirement benefits $2,2642,744$

Other liabilities $3,0102,962$

Total liabilities $21,17120,987$

$3$M Company shareholders' equity

Common stock, par value $99$

Additional paid$-$in capital $3,9753,927$

Retained earnings $30,80229,649$

Treasury stock $(22,457)(19,622)$

Accumulated other comprehensive income $($loss$)(5,204)(5,326)$

Total $3$M Company shareholders' equity $7,1258,637$

Noncontrolling interest $5259$

Total equity $7,1778,696$

Total liabilities and equity $$28,348$ $$29,683$

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 $1$

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

Year NOA

$2018$ Answer $2$

$2017$ Answer $3$

c$.$ Compute and disaggregate $3$M$$s RNOA into net operating profit margin $($NOPM$)$ and net operating asset turnover $($NOAT$)$ for $2018.$ Demonstrate that RNOA $=$ NOPM $\backslash$times NOAT.

Numerator Denominator RNOA

Answer $4$

Answer $5$

Answer $6$

Answer $7$

Numerator Denominator NOPM

Answer $8$

Answer $9$

Average equity

Answer $10$

$0$

Answer $11$

$24836$

$0$

Numerator Denominator NOAT

Answer $12$

Interest expense net

Answer $13$

Answer $14$

$24836$

Answer $15$

Ratio Number

NOPM Answer $16$

$16\mathrm{.}2$

NOAT Answer $17$

RNOA

$0$

$***$RNOA may be different from first RNOA calculation due to rounding

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

Year NNO

$2018$ Answer $18$

$2017$ Answer $19$

Year NNO Total equity NOA

$2018$ Answer $20$

Answer $21$

$0$

$2017$ Answer $22$

Answer $23$

$0$

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

Numerator Denominator ROE

Answer $24$

NOPAT

Answer $25$

Answer $26$

Answer $27$

f$.$ What is the nonoperating return component of ROE for $2018?$

ROE RNOA Nonoperating component of ROE

Answer $28$

Answer $29$