Profitability Analysis

Atlantic and Pacific companies are direct competitors in the Manufacturing industry. You are developing an assessment of the relative profitability of the two companies for dissemination to your clients. Using the financial statements and additional notes, analyze and interpret the relative profitability of each firm using the NOPAT model.

1. For both firms, compute net operating profit after tax (NOPAT) for 2020 and net operating assets (NOA) for 2020 and 2019.
2. For 2020, compute Return on Net Operating Asset (RNOA) for both firms and disaggregate it into net operating profit margin (NOPM) and net operating asset turnover (NOAT).
3. For 2020, compute ROE and infer the non-operating return component of ROE for both firms.
4. Based on your answers to a-c above, comment on the profitability and quality of earnings of Atlantic vs. Pacific based on an analysis of the financial statements and accompanying notes.

Income Statement	Atlantic	Pacific
(amount in millions)	2020	2020
Net Sales	78,664	64,789
Cost of Sales	50,445	45,344
Gross Profit	28,219	19,445
Operating Expenses
Selling, general & administrative expenses	10,443	8,443
Depreciation and amortization	1,538	708
Total operating expenses	11,981	9,151
Interest and other (income) expense
Interest and investment income	(20)	(77)
Interest expense	620	500
Other	(66)
Interest and other, net	534	423
Earnings before provision for income taxes	15,704	9,871
Provision for income taxes	2,635	1,178
Consolidated net income	13,069	8,693
Less: Net income attribubutable to non controlling interest		(100)
Consoldated net income attributable to the firm	13,069	8,593

Balance Sheet,	Atlantic	Pacific
Amount in Millions except share and per share data	2020	2019	2020	2019
Assets
Current Assets
Cash and cash equivalents	1,678	1,274	745	9,234
Short term investments	60	329	125	286
Receivables, net	1,395	1,245	217	183
Merchandise inventories	3,254	2,645	1,578	1,675
Prepaid expenses & other current assets	567	735	567	453
Total current assets	6,954	6,228	3,232	11,831
Long-term investments
Equity and cost investments
Property, plant and equipment, net	48,727	45,067	26,785	22,543
Notes receivable	140	135	69	67
Other long-term assets	333	295	1,134	1,013
Long term investments			271	504
Goodwill			756	654
Total Assets	56,154	51,725	32,247	36,612
Current liabilities:
Accounts payable	5,376	4,856	4,457	4,102
Accrued liabilities	4,765	4,490	1,710	1,783
Deferred revenue			824	801
Accrued compensation and employee benefits			670	613
Current portion of long-term debt & capital leases	2,653	533	687	956
Total current liabilities	12,794	9,879	8,348	8,255
Long-term debt	13,789	12,785	7,881	9,469
Other long-term liabilities	2,051	2,146	901	865
Deferred income taxes, net	319	340	455	531
Deferred revenue - extended protection plans			715	704
Long term obligations under capital leases	948	900
Total liabilities	29,901	26,050	18,300	19,824
Shareholders' equity:
Common stock	8,564	7,864	645	876
Additional paid-in capital	7,984	6,966	26	14
Retained earnings	20,002	17,246	11,224	13,852
Accumulated other comprehensive income/(loss)	397	293	52	46
Treasury stock	(10,694)	(6,694)
Total firm shareholders' equity	26,253	25,675	11,947	14,788
Noncontrolling interest			2,000	2,000
Total equity	26,253	25,675	13,947	16,788
Total liabilities and stockholders' equity	56,154	51,725	32,247	36,612
Footnotes, Accounting Policies, and Additional Information
1. Inventories:Both firms state inventories at lower of cost or market using the moving average cost method.
Atlantic:
Inventories are stated at lower of cost or market using the average cost method of inventory accounting.
Pacific:
Inventories are stated at lower of cost or market using the first-in-first out method of inventory accounting.
2. Property, plant, and equipment (PPE):
Atlantic:
Property is recorded at cost. Property consists of land, builidings, equipment, construction in process and
PPE held under capital leases. Depreciation is computed using straight line method over estimated useful
lives of the assets, ranging from 2 to 15 years for equipment, and 30 to 40 years for builidngs.
Pacific:
Property is recorded at cost. Property consists of land, builidings, equipment, construction in process.
Depreciation is computed using straight line method over estimated useful lives of the assets, ranging from
5 to 29 years for equipment, and 35 to 45 years for builidngs.
3. Accrued liabilities:Among the accrued liabilities for Firm B are reflected dividends payable of $200 and
$250 million of dividends payable for 2020 and 2019 respectively.
4. Leases: Both firms carry substantial leases which are carried as operating leases. Firm A classifies a small
portion of its total leases as capital leases while Firm B treats all its leases as operating.
5. Common Stock:
Atlantic:
Commons Stock, par value $0.50; authorized: 15 million shares; issued 8,456 million shares at
reporting date 2020 and 8,345 million shares at reporting date 2016;
Outstanding 7,864 at reporting date 2019 and 8,564 at reporting date 2020.
Pacific:
Common Stock, par value $0.25; authorized: 10 million shares; issued and outstanding: 3,504 million shares at reporting date
2020 and 2,580 million shares at reporting date 2019
6. Marginal & statutory tax rates: The marginal and statutory tax rates for both firms is 22%.
7. Market prices: The closing market price at reporting date (current year) forAtlantic was $43.55 and for
Pacific was $15.40.