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    Financial Statement Analysis

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    I need to find the following information for Cissco and their competitors and do the questions below:

    Net operating profit (NOPAT) margin and net operating asset (NOA) turnover for several selected companies for 2005 follow:
    Company NOA Turnover NOPAT Margin
    Albertsons, Inc 3.59 2.20%
    Alcoa, Inc 1.51 5.93%
    Caterpillar, Inc 1.99 6.96%
    Home Depot, Inc 2.72 6.64%
    McDonalds Corporation 0.89 12.61%
    SBC Communications, Inc 0.79 10.62%
    Southwest Airlines 0.74 5.08%
    Target Corporation 2.23 4.54%

    1. Graph the NOPAT margin and NOA turnover for each of these companies. Do you see a pattern revealed that is similar to that shown in the text? Explain. (Note that the graph in the text is based on averages for selected industries. The graph for this problem uses fewer companies and, thus, will not be as smooth.)
    2. Consider the trade-off between profit margin and asset turnover. How can we evaluate companies on this margin and turnover trade-off? Explain.
    3. Do the RNOAs appear adequate to attract capital? Explain. If not, are there unique industry issues that exist in 2005 that might explain a temporary downturn in RNOA?

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    Solution Preview

    Hi there,

    Please see the attached Excel spreadsheet.

    Also, answers to your questions:
    1. As I do not have the text that is referred to in the question, I am unable to comment on a comparison. What I can say is that in terms of the NOPAT, all of the organizations are within a general range of 2 to 12%, except for CISCO, which is way up at almost 30%. Regarding the NOA, all of the companies are in a pretty close range from .73 to 3.59.

    2. Evaluating companies based on these ratios:
    Some info on ROA:
    A useful indicator of how profitable a company is relative to its total assets. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. ROA tells you what earnings were generated from invested capital (assets). ROA for public companies can vary substantially, depending on the industry they are in.
    Some useful info on Profit Margin:
    A ratio of profitability calculated as gross earnings divided by revenues (or, said another way, gross profits divided by sales). It measures how much out of every dollar of sales a company actually keeps in earnings.

    The long-term operating asset turnover rate is difficult to affect because it involves assets that are difficult to get rid of. Since companies cannot easily divest of part of a manufacturing plant, improvement in the ratio can usually be realized by increasing throughput (e.g., increased sales). Many companies have addressed this issue by forming corporate alliances with other companies to spread manufacturing capacity over multiple users. Gains in the long-term operating asset ratio are difficult to realize and require creative thinking, but can lead to significant improvements in total asset turnover and, consequently, in RNOA and ROE.

    Profit margin is very ...