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 $$21,494$ $$20,767$

Operating expenses

Cost of sales $10,94310,532$

Selling, general and administrative expenses $4,9874,347$

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

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

Total operating expenses $17,20416,163$

Operating income $4,2904,604$

Other expense, net$*13694$

Income before income taxes $4,1544,510$

Provision for income taxes $1,0741,757$

Net income including noncontrolling interest $3,0802,753$

Less: Net income attributable to noncontrolling interest $1411$

Net income attributable to $3$M $$3,066$ $$2,742$

$*$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 $$1,872$ $$2,003$

Marketable securities $3801,076$

Accounts receivable $3,2933,222$

Total inventories $2,8642,646$

Prepaids $741937$

Other current assets $349266$

Total current assets $9,49910,150$

Property, plant and equipment$-$net $5,7325,816$

Goodwill $6,5936,897$

Intangible assets$-$net $1,7431,926$

Other assets $1,3451,395$

Total assets $$24,912$ $$26,184$

Current liabilities

Short$-$term borrowings and current portion of long$-$term debt $$794$ $$1,216$

Accounts payable $1,4861,276$

Accrued payroll $749870$

Accrued income taxes $243310$

Other current liabilities $1,8201,777$

Total current liabilities $5,0925,449$

Long$-$term debt $8,7987,935$

Pension and postretirement benefits $1,9592,375$

Other liabilities $3,0102,962$

Total liabilities $18,85918,721$

$3$M Company shareholders' equity

Common stock, par value $99$

Additional paid$-$in capital $3,2743,327$

Retained earnings $26,65725,659$

Treasury stock $(19,435)(16,982)$

Accumulated other comprehensive income $($loss$)(4,504)(4,609)$

Total $3$M Company shareholders' equity $6,0017,404$

Noncontrolling interest $5259$

Total equity $6,0537,463$

Total liabilities and equity $$24,912$ $$26,184$

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 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

$0$

Answer

Numerator Denominator NOPM

Answer

NOPAT

Answer

Net sales

Answer

Answer

$21,494$

$0$

Numerator Denominator NOAT

Answer

Net sales

Answer

Average net operating assets $($NOA$)$

Answer

$21,494$

Answer

Ratio Number

NOPM Answer

NOAT Answer

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

$2017$ Answer

Year NNO Total equity NOA

$2018$ Answer

Answer

$0$

$2017$ Answer

Answer

$0$

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

Numerator Denominator ROE

Answer

Net income $($adjusted$)$

Answer

Average net nonoperating obligations $($NNO$)$

Answer

Answer

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

ROE RNOA Nonoperating component of ROE

Answer

Answer

$0$