Analysis and Interpretation of Profitability

Balance sheets and income statements for 3M Company follow.

3M COMPANYConsolidated Statements of IncomeFor Years ended December 31 ($ millions)20182017Net sales$18,152$17,538Operating expenses Cost of sales9,2428,894Selling, general and administrative expenses4,2123,671Research, development and related expenses1,8211,870Gain on sale of businesses(547)(586)Total operating expenses14,72813,849Operating income3,4243,689Other expense, net*11580Income before income taxes3,3093,609Provision for income taxes9071,484Net income including noncontrolling interest2,4022,125Less: Net income attributable to noncontrolling interest1411Net income attributable to 3M$2,388$2,114*Interest expense, gross$350$322

3M COMPANYConsolidated Balance SheetsAt December 31 ($ millions, except per share amount)20182017Current Assets Cash and cash equivalents$1,581$1,691Marketable securities3801,076Accounts receivable2,7812,721Total inventories2,4192,235Prepaids741937Other current assets349266Total current assets8,2518,926Property, plant and equipment-net4,8414,912Goodwill5,5685,824Intangible assets-net1,4721,627Other assets1,3451,395Total assets$21,477$22,684Current liabilities Short-term borrowings and current portion of long-term debt$671$1,027Accounts payable1,2551,078Accrued payroll749870Accrued income taxes243310Other current liabilities1,5371,501Total current liabilities4,4554,786Long-term debt7,4306,701Pension and postretirement benefits1,6552,005Other liabilities3,0102,962Total liabilities16,55016,4543M Company shareholders' equity Common stock, par value99Additional paid-in capital2,5712,725Retained earnings22,51221,670Treasury stock(16,413)(14,341)Accumulated other comprehensive income (loss)(3,804)(3,892)Total 3M Company shareholders' equity4,8756,171Noncontrolling interest5259Total equity4,9276,230Total liabilities and equity$21,477$22,684Combined federal and state statutory tax rate22%

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.

YearNOA 2018

Answer

2017

Answer

c. Compute and disaggregate 3Ms RNOA into net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2018. Demonstrate that RNOA = NOPM NOAT.

NumeratorDenominatorRNOA Answer Net sales Tax expense Interest expense net Net income Net income (adjusted)NOPAT Net nonoperating expense (NNE)Average assets Average equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)Answer Net sales Tax expenseInterest expense net Net income Net income (adjusted)NOPATNet nonoperating expense (NNE)Average assets Average equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)

Answer

Answer

NumeratorDenominatorNOPM AnswerNet salesTax 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)AnswerNet salesTax 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

NumeratorDenominatorNOAT AnswerNet salesTax 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)AnswerNet salesTax 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

RatioNumber NOPM

Answer

NOAT

Answer

RNOA

***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

YearNNO 2018

Answer

2017

Answer

YearNNOTotal equityNOA 2018

Answer

Answer

2017

Answer

Answer

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

NumeratorDenominatorROE AnswerNet salesTax 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)AnswerNet salesTax 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. What is the nonoperating return component of ROE for 2018?

ROERNOANonoperating component of ROE

Answer

Answer