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 $$18,152$ $$17,538$

Operating expenses

Cost of sales $9,2428,894$

Selling, general and administrative expenses $4,2123,671$

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

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

Total operating expenses $14,72813,849$

Operating income $3,4243,689$

Other expense, net$*11580$

Income before income taxes $3,3093,609$

Provision for income taxes $9071,484$

Net income including noncontrolling interest $2,4022,125$

Less: Net income attributable to noncontrolling interest $1411$

Net income attributable to $3$M $$2,388$ $$2,114$

$*$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 $$1,581$ $$1,691$

Marketable securities $3801,076$

Accounts receivable $2,7812,721$

Total inventories $2,4192,235$

Prepaids $741937$

Other current assets $349266$

Total current assets $8,2518,926$

Property, plant and equipment$-$net $4,8414,912$

Goodwill $5,5685,824$

Intangible assets$-$net $1,4721,627$

Other assets $1,3451,395$

Total assets $$21,477$ $$22,684$

Current liabilities

Short$-$term borrowings and current portion of long$-$term debt $$671$ $$1,027$

Accounts payable $1,2551,078$

Accrued payroll $749870$

Accrued income taxes $243310$

Other current liabilities $1,5371,501$

Total current liabilities $4,4554,786$

Long$-$term debt $7,4306,701$

Pension and postretirement benefits $1,6552,005$

Other liabilities $3,0102,962$

Total liabilities $16,55016,454$

$3$M Company shareholders' equity

Common stock, par value $99$

Additional paid$-$in capital $2,5712,725$

Retained earnings $22,51221,670$

Treasury stock $(16,413)(14,341)$

Accumulated other comprehensive income $($loss$)(3,804)(3,892)$

Total $3$M Company shareholders' equity $4,8756,171$

Noncontrolling interest $5259$

Total equity $4,9276,230$

Total liabilities and equity $$21,477$ $$22,684$

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

$2,440$

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

Year NOA

$2018$ Answer

$11,067$

$2017$ Answer

$11,191$

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

NOPAT

Answer

Average net operating assets $($NOA$)$

Answer

$2,670\mathrm{.}72$

Answer

$11,129$

$24$

Numerator Denominator NOPM

Answer

NOPAT

Answer

Net sales

Answer

$1,862\mathrm{.}64$

Answer

$18,152$

$10\mathrm{.}26$

Numerator Denominator NOAT

Answer

Net sales

Answer

Average net operating assets $($NOA$)$

Answer

$18,152$

Answer

$11,129$

$1\mathrm{.}63$

Ratio Number

NOPM Answer

$0\mathrm{.}19$

NOAT Answer

$1\mathrm{.}63$

RNOA

$0\mathrm{.}31$

$***$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

$6,140$

$2017$ Answer

$4,961$

Year NNO Total equity NOA

$2018$ Answer

$6,140$

Answer

$4,927$

$11,067$

$2017$ Answer

$4,961$

Answer

$6,230$

$11,191$

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

Numerator Denominator ROE

Answer

Net income

Answer

Average equity

Answer

$2,388$

Answer

$5,523$

$43\mathrm{.}24$

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

ROE RNOA Nonoperating component of ROE

Answer

$43\mathrm{.}3$

Answer

$0\mathrm{.}11$

$43\mathrm{.}19$