XYZ Company’s ROIC from operations in 2017 differs from that in 2016. Which of the following makes the largest contribution to the change?

Question

BlackTom AI · Accepted Answer

To understand what drives the change in XYZ Company’s ROIC from operations between 2016 and 2017, we need to examine the components that feed ROIC: operating profitability (NOPLAT) and the efficiency of turning invested capital into sales (capital turnover).

Option a: Rising capital turnover. Capital turnover = Sales / Invested Capital. From the data, sales rise from 1100 to 1200, and invested capital (approx. total assets minus financing) also grows modestly (assets move from 1370 to 1400). The change in turnover is not large enough to explain a substantial decline in ROIC, and if turnover improved even slightly, it would tend to raise ROIC rather than drive a large drop. Therefore, rising turnover is unlikely to be the largest contributor to the decline.

Option b: Falling capital turnover. If invested capital grew faster than sales, turnover could fall and depress ROIC. While there is some increase in assets, the effect on turnover is not dramatic enough to account for the sizable ROIC decrease seen from 2016 to 2017. Thus, this option does not likely explain the largest change.

Option c: Rising NOPLAT margins. NOPLAT margin is NOPLAT relative to sales. We compute NOPLAT = EBIT × (1 − tax rate). With a constant 30% tax rate, NOPLAT for 2016 is 180 × 0.7 = 126, and for 2017 it is 170 × 0.7 = 119. Sales rise from 1100 to 1200. The NOPLAT margin (NOPLAT/Sales) moves from about 126/1100 ≈ 11.45% in 2016 to 119/1200 ≈ 9.92% in 2017. This is a meaningful drop in operating profitability relative to sales, which would pull ROIC downward. However, the margin actually fell while EBIT also declined slightly; the magnitude of the margin drop is notable, but we need to compare with other effects, since ROIC depends on both margins and capital efficiency.

Option d: Falling NOPLAT margins. As shown above, the NOPLAT margin declines from roughly 11.45% in 2016 to about 9.92% in 2017 despite higher sales. This represents a meaningful deterioration in how much operating profit remains after tax per dollar of sales, directly reducing ROIC. Since ROIC is highly sensitive to margins, a sizable drop in NOPLAT margins is a strong candidate for contributing the most to the observed ROIC change.

Option e: Rising sales. While higher sales can influence ROIC (through both margins and the denominator of turnover), rising sales alone, without a proportional rise in NOPLAT or a corresponding reduction in invested capital, does not guarantee a larger ROIC change. In this case, margins actually decrease, and invested capital increases modestly, so rising sales by itself cannot explain the larger drop in ROIC.

Putting it all together, the most impactful driver among the options is the decline in NOPLAT margins, which reduces operating profitability per unit of sales and is typically the dominant factor in a ROIC decline when margins compress despite modest sales growth and asset increases. The combination of a shrinking NOPLAT margin and only modest capital turnover changes yields the largest contribution to the observed ROIC change.

Dashboard Week 5 Optional Quiz

XYZ Company’s ROIC from operations in 2017 differs from that in 2016. Which of the following makes the largest contribution to the change?

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