Nordstrom Incâ€analyzing Financial Performance

NORDSTROM INCANALYZING FINANCIAL PERFORMANCE RETURN ON OPOERATING ASSETS ADDITIVE DUPONT precedent Summary Nordstrom is one of the oldest retail companies in the United States. It started from 1901 in Seattle and has been giving to a powerful retailer in national bea. Selling tall quality products is the most essential method for Nordstrom to collect its revenue. At the homogeneous time, Nordstrom likewise offers credits and debts to customers by his banks. In this case, we be tense uping to psychoanalysis Nordstroms fiscal statements and calculate few simple proportionalitys to approach the achievement of this keep company.The main point in our analysis is to figure out how Nordstrom is using its direct(a) additions to get begeting. a). roe is used to narration the utmost meshing in a period as a percentage of stockholders paleness. In opposite word, hard roe means how much net income we foundation get by using shareholders investment. roe is more important than net income in dollar harm because ROE is a ratio. balance allowed analysts to compare companies performance oer the period. In fact, the ratio can also help us compare companies in a different coat or different industry.Net income in dollar terms is not widely used because this method is limited by companies different situations. b). ROE and RONA are both useful methods to determine a companys performance. However, ROE and RONA measure a companys performance in a different way. ROE considers entire companys income, expenses and gain/ leaving of a companys profit RONA only consider a companys net profit from run activities. On the other hand, ROE calculates all returns which come from shareholders building of justice RONA only calculates the operating assets and liabilities which dont include the financing activities.The non-operating service of process of ROE represents is that a company captures profit from financing activities and investing activities (both of them ar e not operating activities). c). Marginal measure calculate means a rate of revenue that one company needs to pay on its next dollar of taxable income. Marginal tax rate entrust affect companys future economic decisions because this tax rate is related to the economic situation. So, companies not only need to consider federal official income tax but also need to consider state income tax. tax revenue safeguard is the tax reduction, which is created by items that are allowed to take deduction from tax income.For in position, interest on debt is tax-deductible, taking on debt makes tax shield. Tax shield is an important method to saving cash flow and it is a of import part of companies business valuation (Wikipedia, 2012). d. (in millions) Fiscal 2009 Fiscal 2008 Fiscal 2007 direct assets 6,579 5,661 5,600 Operating liabilities 2,394 1,938 1,988 Net operating assets 4,185 3,723 3,612 e. 2009 NOPAT= 441 + (138? (1- 38. 5%) = 526 2008 NOPAT= 401 + (131? (1-38. 5%) =482 The dolla r essence of Nordstroms tax shield from nonoperation activities in fiscal 2009 is $53 ( $ 138 x 38. 5 % ). f. 009 RNOA = $526 /($4,185 + $3,723)/2 = $526 / $3,954 = 13. 3% 2008 RNOA = $482 /($3,723 + $3,612)/2 = $482 / $3,668 = 13. 1% g. RNOA is improved over the two years. In place to understand the development, we can examine NOPM and NOAT. NOPM is 6. 1 % ( $ 526 / $ 8, 627) in 2009 and 5. 6 % ( $ 482 / 8, 573) in 2008. NOPM analyzes the amount of net operating profit after tax for distributively dollar that is been earned by gross revenue. The summation in NOPM may be seen a small increase but if the volume of the gross revenue is considered, the increase would bear huge impact on a increase in net income. NOAT is 2. 18 % ($ 8, 627 / 3,954) in 2009 and 2. 4 % ($ 8, 573 / 3, 688) in 2008. The reduce in NOAT draws that the company is slight efficient and movementive in terms of generating sales by use of assets. To conclude, it could be said that the company achieved vi olate probability by a worse use of operating assets. However, the stance of the company is good and becoming better if we emphasize the increase in RNOA over the two years. h. 2009 ROE = $441 /($1,572+ $1,210)/2 = 31. 7 % Non operating return ROE RNOA = 31. 7 % 13. 3 % = 18. 4 % 2008 ROE = $401 /($1, 210 + $ 1,115)/2 = 34. 5 % Non operating return ROE RNOA = 34. 5 % 13. 1 % = 21. 4 % The ROE is decreased from 34. % to 31. 7 % over the two years. The difference between ROE and RNOA shows that there is non-operating return. Non-operating returns shows the effect of debt to finance operating assets. Moreover, it shows that Nordstrom uses liabilities or debt to increase operating assets and earnings. Nordstrom uses debt and the cost of the debt is less than the earnings, therefore it is beneficial for the company. i. Net non-operating obligations 2007 $261+ $2,236 = $2,497 2008 $275+$24+$$2,214 = $2,513 2009 $356+2,257= $2,613 FLEV 2009 ($2,613+$2,513)/2/$1,390 = 1. 84 2008 $2,523+ $2,497)/2/$1,163 = 2. 15 It shows that Nordstrom has $1. 4 of non-operating liabilities for every dollar of shareholders equity. The company has less financial leverage compare to year 2008. Additionally, the company does not have non-operating assets FLEV measure can be used as companys debt-to-equity ratio too. Spread 2009 13. 3% ($85/$2,563) = 10. 0% 2008 13. 1% ($81/$2,505) = 9. 9% Nordstroms RNOA earned 13. 3% and 13. 1% in 2008 and 2009, while the company paying only 3. 3% and 3. 2% for its debt. Therefore, it means that the company operating return exceeds the cost of borrowing. Non-operating return 2009 1. 84 x 10. 0% = 18. 4% 2008 2. 15 x 9. 9% 21. 3% j. Nordstrom TJX Return on equity 31. 7% 48. 3% RNOA 13. 3% 38. 3% NOPM 6. 1% 6. 1% NOAT 2. 1% 6. 28% Non operating return 18. 4% 10. 1% FLEV 1. 84 0. 29 Spread 10. 0% 34. 9% The ROE of Nordstrom is 31. 7% and TJX 48. 3% show that both of the companies are very profitable. The companies are very different than each other in terms of strategies. Nordstrom mostly uses leverage in order to increase the returns on the other hand, TJX uses mostly stockholders equity and less leverage. two of the companies have the same NOPM at 6. 1% that states that both companies make 6. 1 cents after tax for every dollar of sale.Furthermore, TJX has better operating asset turnover (NOAT) than Nordstrom, which shows that TJX is converting its operating assets to cash three times faster than Nordstrom. RNOA is measured by multiplying NOAT and NOPM that is 13. 3 % for Nordstrom and 38. 4 % for TJX. The non-operating return is different for companies. The forms are 18. 4 % for Nordstrom and 10. 1 % for TJX. The numbers show that Nordstrom has more leverage than TJX. Nordstroms FLEV is much higher than TJX which shows that TJX has less obligations and leverage than Nordstrom with regarding to equity. TJXs spread is 3 times higher than Nordstrom.Although both companies have relatively close non-operating expenses to non-oper ating obligations number ( cost of debt ), the difference in Spread is related to RNOA numbers. Additionally, TJX does not have many obligations, which lead to low non-operating return. k. In order to improve RNOA in 2010, the company can improve its NOPM or its NOAT. Nordstrom managements have to improve their sales and reduce the expenses so as to improve NOPM. Decreasing the amount of operating assets such as long-term fixed assets can increase NOAT. Additionally, they can try some ways to collect account receivable quickly, tell on inventories quickly nd sell some property or equipment. In terms of liabilities, Nordstrom managements can defer to pay bill in account payable and income tax liabilities. These methods may improve Nordstroms RNOA. Conclusion Nordstrom Inc. s RNOA ratio shows that the companys financial performance in 2009 is passably better than in 2008. More specifically, the RNOA is increased from 13. 3% to 13. 1 % over the two years but its ROE is decreased. The difference between ROE and RNOA shows that there is non-operating return. Non-operating returns shows the effect of debt to finance operating assets.Moreover, it shows that Nordstrom uses liabilities or debt to increase operating assets and earnings. Nordstrom uses debt and the cost of the debt is less than the earnings, therefore it is beneficial for the company. Based on the selective information from balance sheet, on the other hand, the managements utilized more liabilities in 2009 than 2008 to increase the returns.. That means Nordstroms managers did good jobs in financial performance in 2009. However, compared with others more successful companies in the same industry, such as TJX, Nordstrom managements should try others effective methods to improve their returns.