Question

Analysis and Interpretation of Profitability
Balance sheets and income statements for Best Buy Co., Inc. follow.

Consolidated Statements of Earnings
For Fiscal Years Ended ($ millions)	February 26, 2011	February 27, 2010	February 28, 2009
Revenue	$ 50,272	$ 49,694	$ 45,015
Cost of goods sold	37,611	37,534	34,017
Restructuring charges - cost of goods sold	24	--	--
Gross Profit	12,637	12,160	10,998
Selling, general and administrative expenses	10,325	9,873	8,984
Restructuring charges	198	52	78
Goodwill and tradename impairment	--	--	66
Operating income	2,114	2,235	1,870
Other income (expense)
Investment income and other	51	54	35
Investment impairment	--	--	(111)
Interest expense	(87)	(94)	(94)
Earnings before income tax expense and equity in income of affiliates	2,078	2,195	1,700
Income tax expense	714	802	674
Equity in income of affiliates	2	1	7
Net earnings including noncontrolling interest	1,366	1,394	1,033
Net income attributable to noncontrolling interest	(89)	(77)	(30)
Net income attributable to Best Buy Co., Inc.	$ 1,277	$ 1,317	$ 1,003

Consolidated Balance Sheets
($ millions, except footnotes)	February 26, 2011	February 27, 2010
Assets
Current assets
Cash and cash equivalents	$ 1,103	$ 1,826
Short-term investments	22	90
Receivables	2,348	2,020
Merchandise inventories	5,897	5,486
Other current assets	1,103	1,144
Total current assets	10,473	10,566
Property and equipment
Land and buildings	766	757
Leasehold improvements	2,318	2,154
Fixtures and equipment	4,701	4,447
Property under capital lease	120	95
	7,905	7,453
Less: Accumulated depreciation	4,082	3,383
Property and equipment, net	3,823	4,070
Goodwill	2,454	2,452
Tradenames, net	133	159
Customer relationships, net	203	279
Equity and other investments	328	324
Other noncurrent assets	435	452
Total assets	$ 17,849	$ 18,302
Liabilities and equity
Current liabilities
Accounts payable	$ 4,894	$ 5,276
Unredeemed gift card liabilities	474	463
Accrued compensation and related expenses	570	544
Accrued liabilities	1,471	1,681
Accrued income taxes	256	316
Short-term debt	557	663
Current portion of long-term debt	441	35
Total current liabilities	8,663	8,978
Long-term liabilities	1,183	1,256
Long-term debt	711	1,104
Equity
Best Buy Co., Inc. Shareholders' equity
Preferred stock, $1.00 par value	--	--
Common stock, $0.10 par value	39	42
Additional paid-in capital	18	441
Retained earnings	6,372	5,797
Accumulated other comprehensive income (loss)	173	40
Total Best Buy Co., Inc. shareholders' equity	6,602	6,320
Noncontrolling interest	690	644
Total equity	7,292	6,964
Total liabilities and equity	$ 17,849	$ 18,302

(a) Compute net operating profit after tax (NOPAT) for 2011. Assume that the combined federal and statutory rate is: 37.0%. (Hint: Treat equity in income of affiliates as operating. Round your answer to the nearest whole number.)

(c) Compute Best Buy's RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2011. (Do not round until final answer. Round two decimal places. Do not use NOPM x NOAT to calculate RNOA.)

(e) Compute return on equity (ROE) for 2011. (Round your answers to two decimal places. Do not round until your final answer.)

(f) Infer the nonoperating return component of ROE for 2011. (Use answers from above to calculate. Round your answer to two decimal places.)

Answer 1

(a) Net Operating profit after tax (NOPAT) for year 2011 can be computed by EBIT * (1- tax rate)

Given federal and statutory rate is 37% and equity in income of affiliates as operating.

NOPAT for year 2011 = (1- 37%) * EBIT i.e. 63% of $2205 (2214+2+89) = $1389 NOPAT for 2011

(b) Best Buy RNOA (Return on Net Operating Assests) can be calculated by NOPAT/Net Operating Assests (NOA)

NOPAT is $1389 and Net Operating Assets= Operating Assets- Operating Liabilities. Hence Best Buy's RNOA is equal to 18.86%

NOPM can be calculated by Operating Income*100/ Net Sales hence (2114/50272)*100 = 4.20%

Net Operating Asset turnover can be computed by Sales/ Average Operating Assets therefore, $50272/$10515 i.e. 4.78 times

Return on Equity can be computed by Net Income/ Capital Employed ( Shareholder's Equity) i.e.$1277/$6602 i.e. 19.34%

(f) Nonoperating return component of ROE can be computed by ROE - RNOA.

Return on Equity(ROE)- Return on Net Operating Assets (RNOA) i.e. 19.34%- 18.86% is equal to 0.48%

Non operating return of ROE can be calculated through ROE- RNOA calculated above.