Analysis and Interpretation of Ratios When RNOA Exceeds ROE

Refer to the balance sheets and income statement below for Facebook Inc.

FACEBOOK INC.
Consolidated Statement of Income
For Year Ended December 31, $ millions	2018
Revenue	$55,838
Costs and expenses
Cost of revenue	13,516
Research and development	10,273
Marketing and sales	7,846
General and administrative	3,451
Total costs and expenses	35,086
Income from operations	20,752
Interest and other income (expense), net	448
Income before provision for income taxes	21,200
Provision for income taxes	3,249
Net income	$17,951

FACEBOOK INC.
Consolidated Balance Sheet
At December 31, $ millions	2018	2017
Current assets
Cash and cash equivalents	$10,019	$12,240
Marketable securities	35,256	33,632
Accounts receivable, net	11,748	9,993
Prepaid expenses and other current assets	1,779	1,020
Total current assets	58,802	56,885
Property and equipment, net	24,683	17,882
Intangible assets, net	1,294	6,045
Goodwill	22,462	18,221
Other assets	2,576	2,135
Total assets	$109,817	$101,168
Current liabilities
Accounts payable	$820	$380
Partners payable	4,702	4,551
Accrued expenses and other current liabilities	5,509	7,053
Deferred revenue and deposits	147	98
Total current liabilities	11,178	12,082
Other liabilities	10,351	6,417
Total liabilities	21,529	18,499
Stockholders' equity
Common stock and additional paid-in capital	47,067	48,906
Accumulated other comprehensive loss	(760)	(227)
Retained earnings	41,981	33,990
Total stockholders' equity	88,288	82,669
Total liabilities and stockholders' equity	$109,817	$101,168
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%. Hint: Carefully consider whether nonoperating expense is positive or negative.

	NOPAT
	Answer

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

	Year	NOA
	2018	Answer
	2017	Answer

c. Compute RNOA and disaggregate it into net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2018.

	Numerator	Denominator	RNOA
	AnswerRevenueTax 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)	AnswerRevenueTax 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
	AnswerRevenueTax 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)	AnswerRevenueTax 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
	AnswerRevenueTax 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)	AnswerRevenueTax 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 return on equity (ROE) for 2018.

	Numerator	Denominator	ROE
	AnswerRevenueTax 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)	AnswerRevenueTax 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