Question

The company is Comerica CMA and its competitor is Huntington Bancshares HBAN

COMERICA (DATA/INFORMATION ABOUT COMPANY)

DISREGARD THE TTM COLUMN Just the three years

Profitability	2016-12	2017-12	2018-12
Tax Rate %	28.81	39.79	19.54
Net Margin %	16.60	23.30	36.87
Asset Turnover (Average)	0.04	0.04	0.05
Return on Assets %	0.65	1.02	1.72
Financial Leverage (Average)	9.36	8.99	9.43
Return on Equity %	6.16	9.37	15.86
Return on Invested Capital %	—	—	—	—
Interest Coverage	—	—	—

Debt/Equity

0.66

0.58

0.86

HBAN- Competitor

Profitability	2015-12	2016-12	2017-12	2018-12
Tax Rate %	24.15	22.61	14.92	14.43
Net Margin %	22.11	18.37	25.76	29.33
Asset Turnover (Average)	0.04	0.04	0.04	0.04
Return on Assets %	0.96	0.76	1.09	1.24
Financial Leverage (Average)	11.44	10.80	10.69	10.99
Return on Equity %	10.88	8.37	11.70	13.47
Return on Invested Capital %	—	—	—	—	—
Interest Coverage

Debt/Equity

0.90

0.94

0.87

1. Find ROE, Net profit margin (listed as net margin), asset turnover, financial leverage for the last three yearsfor your company. You also may use debt/equity ratio in your analysis.
2. Find ROE, Net profit margin (listed as net margin), asset turnover, financial leverage for the last year for its major peer competitor. You also may use debt/equity ratio of peer competitor in your analysis.
3. Has the company’s ROE changed over the last three years? What was the main factor that influenced this change?
4. Compare the ratios of you company to the peer competitor. If the management of the company would like to improve their return on equity, what should the management of the company do?

Answer 1

Return on Equity (ROE)=Net Income/Stockholders Equity =(Net Income/Sales)*(Sales/Total Assets)*(Total assets/Stockholders Equity)

ROE= Net Margin * Asset Turnover * Financial Leverage

Net Margin=Net Income/Sales=(Net Income/Pretax Income)*(Pretax Income/EBIT)*(EBIT/Sales)

Net Margin=Tax burden*Interest Burden*Operating Margin

Total assets/Stockholders Equity =1+(Debt/Equity)

Comerica CMA has Return on Equity (ROE) Lower Than its competitor HBAN in2016

The Reason is:

• Net Margin is Lower
• Financial Leverage is Lower

The Reasons for Lower Net Margin:

• Higher Tax Rate

In 2017 ROE of Comerica CMA improved with ;

• Increase in Net Margin from 16,6% to 23,3%

ROE further improved in 2018 with increase in Net margin to 36,87% and also increase in Financial Leverage .

If the management wishes to increae ROE, it should increase the ASSET TURNOVER