you are working as an equity research analyst and are covering the toy industry.
ID: 2808432 • Letter: Y
Question
you are working as an equity research analyst and are covering the toy industry. You are preparing a equity research report focusing on Mattel. You identify the following from Mattel’s most recent financial statements.
Total Assets $5418
Total Equity $2,629
Sales $5,854
Net Income $685
You also gather the following recent data for the Toy Industry
Industry Average Data
Return on Equity-0.159
Profit Margin-0.071
Total Asset Turnover-1.084
Equity Multiplier-2.064
Conduct a three stage ROE Decomposition Analysis for Mattel.
Provide calculations to show the primary performance advantage that was the largest contributor to the difference in Mattel’s ROE vs. that of an average firm in the industry
Explanation / Answer
The three stage ROE decomposition is :
profit margin = NET INCOME/ SALES
= $685/ $5854
=0.1170
ASSET TURNOVER RATIO :
SALES/ ASSETS
=$5854/ $5418
= 1.08
EQUITY MULTIPLIER :
ASSETS/ EQUITY
= $5418/ $2629
=2.06
ROE = NET PROFIT MARGIN * ASSET TURNOVER * EQUITY MULTIPLIER
=0.1170 *1.08 * 2.06
= 26.03%
THE PRIMARY COMPONENT RESPONSIBLE FOR THE GROWTH IN ROE IS THE PROFIT MARGIN, WHICH IS WAY BETTER THAN THE INDUSTRY AVERAGE.
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