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Indicate which company is more likely to be the gift shop and which is the discount household goods store.... Return on equity (ROE).[r]
(1)Copyright © 2009 by The McGraw-Hill Companies, Inc All rights reserved. McGraw-Hill/Irwin
Statement Analysis
(2)8
CHAPTER
(3)• What are its implications ? • To whom is it important ?
Net income margin
Net income Revenue
= X 100 (%)
(4)• What are its implications ? • To whom is it important ?
Gross margin percent
Gross Profit Revenue
= X 100 (%)
(5)• What are its implications ? • To whom is it important ?
Asset turnover
Revenue Average assets
= (times)
(6)Return on assets (ROA)
Net income Average assets
= X 100 (%)
BASIC OF PROFITABILITY ANALYSIS
(7)BASIC OF PROFITABILITY ANALYSIS
ROA Net income Revenue
= X
Average assets Revenue
(8)8
Example
Chỉ tiêu Company A Company B
Revenue $6,000,000 $6,000,000 Total assets 1,200,000 6,000,000
Net Income 125,000 600,000
The following information is obtained from the financial statements of two retail companies One company is a gift shop in a resort area; the other company is a discount household goods store Neither company has any debt
(9)Basic of profitability analysis
Net income margin
(10)Return on equity (ROE)
Net income Average equity
= X 100 (%)
(11)ROE Net income Revenue
= X
Average assets Revenue
X
Average equity Average assets
ROE = Net income margin X Asset turnover X Asset-to-equity ratio
Profitability Efficiency
(12)(13)Cautions with ROE
ROE of company A is 30%, ROE of company B is 20%
• Did Company A perform better than company B ?
(14)Example 2
Year 2009 VCS DAC DTC HPS
1 Net income margin (%) 17.97 22.50 15.60 12.62
2 ROA (%) 10.28 34.00 22.31 7.43
3 ROE (%) 26.51 69.02 90.11 11.96
4 ROI (%) 13.02 35.66 27.06 7.43
5 Total Liabilities-to-Total
assets ratio 0.58 0.50 0.75 0.38
(15)Return on invested capital (ROI)
• Return on invested capital is defined as:
• Alternatives of invested capital:
– Net operating assets – Stockholders’ equity
Income
(16)Return on net operating assets (RNOA)
NOPAT
(Beginning NOA + Ending NOA) / 2
NOPAT
(Beginning NOA + Ending NOA) / 2
Where
(17)Return on net operating assets (RNOA)
BALANCE SHEET
Operating assets OA Less operating liabilities (OL)
Net operating assets NOA
Financial liabilities FL Less financial assets (FA) Net financial obligations NFO Stockholders’ equity SE Net financing NFO + SE
(18)Disaggregating RNOA
RNOA =
Operating Profit margin x Operating Asset turnover
NOA Avg. Sales Sales NOPAT NOA Avg. NOPAT
Operating Profit margin: measures operating profitability
relative to sales
Operating Asset turnover (utilization): measures effectiveness
(19)Return on common equity (ROCE)
Net income - Preferred dividends
(Beginning equity + Ending equity) / 2
Net income - Preferred dividends
(Beginning equity + Ending equity) / 2 Where
(20)(21)Disaggregating ROCE
(22)Analyzing Return on Common Equity-ROCE
equity rs’
stockholde common
AveragePreferreddividends Dividendpayout
income Net
= rate growth
Equity
Assessing Equity Growth
• Assumes earnings retention
and a constant dividend
payout
• Assesses common equity growth rate through
earnings retention
• Assumes earnings retention
and a constant dividend
payout
• Assesses common equity growth rate through
(23)Analyzing Return on Common Equity-ROCE
Assessing Equity Growth
Assumes internal growth depends on both earnings
retention and return earned on the earnings retained
Assumes internal growth depends on both earnings
retention and return earned on the earnings retained
rate) Payout (1 ROCE = rate growth equity e