Introduction Q6 a. For each company listed below, compute Return on Assets (ROA), which reveals how efficiently a company uses its assets to generate profit (net income). A high ROA ratio depends on managing asset investments and controlling expenses to keep net income high Analyze the components, ROS and Asset Turnover, to better understand corporate strateey (product-differentiation vs. low-cost strategies). ROA is the broadest measure of profitability. ROA = Net Income / Total Assets ROA 24.29% ($ in millions) Microsoft (MSFT) Wal-Mart Stores (WMT) Ford Motor Company (F) Year Ended 6/30/2008 1/31/2009 12/31/2008 Net Income $ 17,681 $ 13,400 $ (14,672) Total Assets $ $ 72,793 72.793 $ 163,429 $ 218,328 b. For each company below, compute ROA by multiplying the two components, Return on Sales and Asset Turnover, previously computed. ROAROS X Asset T/0 ROS X 29.26% Asset Turnover 0.8300 24.29% ($ in millions Microsoft (MSFT) Wal-Mart Stores (WMT) Ford Motor Company (6) Year Ended 6/30/2008 1/31/2009 12/31/2008 The corporation with the strongest overall measure of profitability is (MSFT/ WMT/F) with an ROA of %, indicating that for each dollar invested in assets, the company generates, on average, cents in profits. The corporation with the weakest ROA is (MSFT / WMT/F), because the company reported a net (income/loss). Wal-Mart Stores has (high / low) ROS and (high / low) Asset Turnover, indicating that a (low-cost / product-differentiation) strategy is used, while Microsoft has (high / low) ROS and (high / low) Asset Turnover, indicating that a low-cost / product-differentiation) strategy is used. Ford Motor Company has (high / low) ROS and (high / low) Asset Turnover, indicating that it is (doing well / in trouble). Q7 a. b. The ratio that measures the ability to translate revenue into profit is the (Debt / ROS / Asset Turnover / ROA) ratio. The ratio that measures the proportion of debt used to finance assets is the (Debt / ROS / Asset Turnover / ROA) ratio. The broadest measure of profitability that can be broken down into components to better understand corporate strategy is the (Debt / ROS / Asset Turnover / ROA) ratio. Solutions to FINANCIAL TRIVIA Q1 and 22. A high (Debt/ROS / Asset Turnover/ROA) ratio indicates a high-volume strategy. MFST WMT ($ in millions) 30-June-08 31-Jan-09 31-Dec-08 ASSETS $ 72,793 $ 163,429 $ 218,328 LIABILITIES 36,507 98,144 235,639 STOCKHOLDERS' EQUITY 36,286 65,285 (17,311) REVENUE 60,420 405,607 146,277 NET INCOME $ 17,681 $ 3,400 $ (14,672)