Question

E5-17 LO5-4 Analyzing and Interpreting Return on Assets The TJX Companies, Inc., which operates the T.J. Maxx, Marshalls, and HomeGoods chains, is th ing off-price apparel and home fashions retailer in the U.S. and worldwide. Presented here are se recent income statement and balance sheet amounts (dollars in thousands). Current Year Prior Year Net sales $33.183,744 $30,944,938 Net income 2.298.234 2,277,658 Average shareholders' equity 4,408,837 4,285,653 Average total assets 12,187,120 11,239,591 Source: The TIX Companies, Inc. Required: 1. Compute ROA for the current and prior years and explain the meaning of the change. 2. Explain the major cause(s) of the change in ROA using ROA profit driver analysis. Anabing 551

Answer 1

1. Computation of ROA for the current and prior years:

ROA=Net Income/Total Assets = 2298234/12187120 =18.85% (current year)

=2277658/11239591 = 20.26% (prior year)

The Percentage decrease in the ROA means there is indication that the company's performance is deteriorating.Lower productivity of asset is the key reason for ROAs. This can be cured by proper maintainence or replacement of old assets. The techniques of capital budgeting may help solve such dilemmas.

2.

Debt Capital

Debt capital is the money borrowed from lenders and investors as a loan or venture capital. Debt capital is an asset and how a business invests this asset has a significant impact on the return on asset figures. Ideally, an increase in the percentage of return on assets means that a company has invested its debt capital wisely. When a company pays more to finance debt capital than it is getting from investing this debt capital, the return on asset is low.

Control Expenses

One of the reasons for an increase in the percentage of return on assets is control of business expenses. When a business earns more than it is spending, it can expect to improve and even increase its return on assets. However, this is not always a simple task to undertake because spending less may decrease sales volume. A good approach is to invest in those assets or undertake those expenses that are extremely necessary for business operation. This necessity is determined by the needs of the business at any given time