Question

P1-41. Computing Return on Equity and Return on Assets The following table contains financial statement information for Walmart Stores Inc. $ millions Total Assets Net Income Sales Equity 2015..... 2014.... 2013.... $199,581 203,490 204,751 $14,694 16,363 16,022 $478,614 482,229 473,076 $80,546 81,394 76,255 L U I . . . . . . . . . . . . . . . . . . . . . . . . .

Answer 1

Answer:

a)

Calculation of Return on equity in 2014 & 2015:

Particulars	Calculation	Amount
Return on Equity in 2014	= Net Income / Average Equity =$ 16,363 / $ 78,825 = (0.2075)*100 [convert to percent] = 20.75%(approx)	20.75%
Return on Equity in 2015	= Net Income / Average Equity =$ 14,694 / $ 80,970 = (0.1814)*100 [convert to percent] = 18.14%(approx)	18.14%

• The ROE has declined from 20.75 % in 2014 to 18.14 % in 2015. Wal-Mart's ROE is lower than the business normal of 18.9 %, which is certainly not a good sign.

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b)

Calculation of Return On Assets in 2014 & 2015:

Particulars	Calculation	Amount/ percentage
Return on Assets in 2014	= Net Income / Average Total Assets. =$ 16,363 / $ 204,121 =(0.080163)*100 [convert to percent] = 8.02% (approx)	8.02%
Return on Assets in 2015	= Net Income / Average Total Assets. =$ 14,694 / $ 201,536 =(0.07291)*100 [convert to percent] =7.29%(approx)	7.29%

• Return on Assets is  additionally indicating a declining pattern from 2014 to 2015.
• In any case, ROA of Wal-Mart is higher when contrasted with the business normal ROA of 7.1 %.

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c) The factors are allow a company like Walmart to reap above average returns:

It is apparent or evidence that Wal-Mart is working with high  financial leverage. ( Equity is significantly lower than all assets. Along these lines, a huge part of total assets must be financed by debt capital). This ought to permit Wal-Mart to earn better than expected returns. An increase in sales can prompt an a lot bigger increment in Return on equity(ROE).