This adjusted numerator better reflects the companys

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This adjusted numerator better reflects the company's operating profit as it measures return on assets exclusive of financing costs (independent of the capital structure decision). This adjusted ROA is typically reported by data collection services such as Compustat and Capital IQ, while the unadjusted is not. ("Statutory tax rate" in the ROA formula is the federal statutory tax rate plus the state tax rate net of any federal tax benefits; we use the 37% federal and state tax rates as explained in the NOPAT computation.) The denominator adjustment is less common. That adjustment removes non-interest-bearing short-term li- abilities (accounts payable and accrued liabilities) from total assets. The adjusted assets in the denominator are considered to better approximate the net assets that must be financed by long-term creditors and stockholders. In sum, adjustments to ROA move the numerator closer to net operating profit after-tax (NOPAT) and move the denominator closer to net operating assets (NOA). The resulting ROA ratio is then closer to the return on net op- erating assets (RNOA). Illustration of DuPont Disaggregation To illustrate DuPont disaggregation analysis, we use Target's income statement and balance sheet reported earlier in this module. Exhibit 3B.1 shows the computation for each component of the DuPont disaggregation analysis applied to Target. EXHIBIT 3B.1 - - - - ---- Computation of DuPont Disaggregation Analysis for Target Asset turnover (AT) . Net income Sales Sales $2,920 = 4.33o/c $67,390 0 $67,390 = 1 53 ($43,705 + $44,533)/2 . ($43,705 + $44,533)/2 = 2 86 ($15,487 + $15,347)/2 . $2,920 = 18 94O/C ($15,487 + $15,347)/2 . 0 Profit margin (PM) . Financial leverage (FL) . Average total assets Average total assets Average total equity Net income Return on equity (ROE) . Average total equity or PM x AT x FL Return on assets (Adjusted) . . . . . . . . .. Net income + [Interest expense x (1 - Statutory Tax rate)] Average total assets or 4.33% x 1.53 x 2.86 = 18.94 {$2,920 + [$757 x (1 - 37%)]) = 7.70% ($43,705 + $44,533)/2
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