RETURN ON OPOERATING ASSETS ADDITIVE DUPONT MODEL
Nordstrom is one of the oldest retail companies in the United States. It started from 1901 in Seattle and has been grown to a powerful retailer in national area. Selling high quality products is the most important method for Nordstrom to collect its revenue. At the same time, Nordstrom also offers credits and debts to customers by his banks. In this case, we are trying to analysis Nordstrom’s financial statements and calculate few simple ratios to approach the performance of this company. The main point in our analysis is to figure out how Nordstrom is using its operating assets to get returning.
a). ROE is used to measure the net profit in a period as a percentage of shareholder’s equity. In other word, ROE means how much net income we can get by using shareholders’ investment. ROE is more important than net income in dollar terms because ROE is a ratio. Ratio allowed analysts to compare companies’ performance over the period. In fact, the ratio can also help us compare companies in a different size or different industry. Net income in dollar terms is not widely used because this method is limited by companies’ different situations.
b). ROE and RONA are both useful methods to determine a company’s performance. However, ROE and RONA measure a company’s performance in a different way. ROE considers entire company’s income, expenses and gain/loss of a company’s profit; RONA only consider a company’s net profit from operating activities. On the other hand, ROE calculates all returns which come from shareholder’s building of equity; RONA only calculates the operating assets and liabilities which don’t include the financing activities. The non-operating portion of ROE represents is that a company captures profit from financing activities and investing activities (both of them are not operating activities).
c). Marginal tax rate means a rate of tax that one company needs to pay on its next dollar of taxable income. Marginal tax rate will affect company’s future economic decisions because this tax rate is related to the economic situation. So, companies not only need to consider federal income tax but also need to consider state income tax. Tax shield is the tax reduction, which is created by items that are allowed to take deduction from tax income. For instance, interest on debt is tax-deductible, taking on debt makes tax shield. Tax shield is an important method to saving cash flow and it is a significant part of companies’ business valuation (Wikipedia, 2012). d.
(in millions)| Fiscal 2009| Fiscal 2008| Fiscal 2007|
Operating assets| 6,579| 5,661| 5,600|
Operating liabilities| 2,394| 1,938| 1,988|
Net operating assets| 4,185| 3,723| 3,612|
2009 NOPAT= 441 + [(138× (1- 38.5%)] = 526
2008 NOPAT= 401 + [(131× (1-38.5%)] =482
The dollar amount of Nordstrom’s tax shield from nonoperation activities in fiscal 2009 is $53 ( $ 138 x 38.5 % ). f.
2009 RNOA = $526 /[($4,185 + $3,723)/2] = $526 / $3,954 = 13.3% 2008 RNOA = $482 /[($3,723 + $3,612)/2] = $482 / $3,668 = 13.1% g.
RNOA is improved over the two years. In order to understand the increase, we can examine NOPM and NOAT. NOPM is 6.1 % ( $ 526 / $ 8, 627) in 2009 and 5.6 % ( $ 482 / 8, 573) in 2008. NOPM analyzes the amount of net operating profit after tax for each dollar that is been earned by sales. The increase in NOPM may be seen a small increase but if the volume of the sales is considered, the increase would have huge impact on a increase in net income. NOAT is 2.18 % ($ 8, 627 / 3,954) in 2009 and 2.34 % ($ 8, 573 / 3, 688) in 2008. The decrease in NOAT shows that the company is less efficient and effective in terms of generating sales by use of assets. To conclude, it could be said that the company achieved better probability by a worse use of operating assets. However, the stance of the company is...