Financial

Statement
Analysis

K R Subramanyam
John J Wild

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 8-2

Return on Invested Capital and

Profitability Analysis

8
CHAPTER
8-3
8-4
 8-5

Return on Invested Capital

Importance of Joint Analysis
• Joint analysis is where one measure is
assessed relative to another

• Return on invested capital (ROIC) or

Return on Investment (ROI) is an important
joint analysis
 8-6

Return on Invested Capital

ROI Relation
• ROI relates income, or other performance measure,
to a company’s level and source of financing

• ROI allows comparisons with alternative investment

opportunities

• Riskier investments expected to yield a higher ROI

• ROI impacts a company’s ability

to succeed, attract financing,
repay creditors,and reward owners
 8-7

Return on Invested Capital

Application of ROI
ROI is applicable to:

(1) (2) (2) (3) (3)

measuring measuring
measuring Measure
measurefor for
managerial profitability
Profitabilityplanning
planning
andand
effectiveness control
control
 8-8

Return on Invested Capital

Measuring Managerial Effectiveness

• Management is
responsible for all
company activities

• ROI is a measure of managerial

effectiveness in business activities

• ROI depends on the skill, resourcefulness,

ingenuity, and motivation of management
 8-9

Return on Invested Capital

Measuring Profitability

• ROI is an indicator of company

profitability

• ROI relates key summary

measures: profits with financing

• ROI conveys return on invested

capital from different financing perspectives
 8-10

Return on Invested Capital

Measuring for Planning and Control

ROI assists managers with:

• Planning
• Budgeting
• Coordinating activities
• Evaluating opportunities
• Control
 8-11

Components of ROI
• Return on invested capital is defined as:

Income
Invested Capital
 8-12

Components of ROI
Invested Capital Defined

• No universal measure
of invested capital

• Different measures of
invested capital reflect
user’s different
perspectives
 8-13

Components of ROI
Alternative Measures of Invested Capital
Common Measures:

• Net Operating Assets

• Stockholders’ Equity
 8-14

Components of ROI
Net Operating Assets
• Perspective is that of the company
as a whole
• Called return on net operating
assets (RNOA)

RNOA:
 measures operating efficiency/
performance
 reflects return on net operating
assets (excluding financial
assets/liabilities)
 8-15

Components of ROI
Common Equity Capital
• Perspective is that of common
equity holders
• Captures the effect of leverage
(debt) capital on equity holder
return
• Excludes all debt financing and
preferred equity
net income less preferred dividends
average common equity
 8-16

Components of ROI
Computing Invested Capital

• Usually computed using average

capital available for the period
• Typically add beginning and
ending invested capital amounts
and divide by 2
• More accurate computation is to
average interim amounts
— quarterly or monthly
 8-17

Components of ROI
Adjustments to Invested Capital and Income Numbers

 Many accounting numbers require

analytical adjustment—see prior chapters
 Some numbers not reported in financial
statements need to be included
 Such adjustments are necessary for
effective analysis of return on invested
capital
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Components of ROI
Return on Net Operating Assets -- RNOA

NOPAT
(Beginning NOA + Ending NOA) / 2

Where
• NOPAT = Operating income x (1- tax rate)
• NOA = net operating assets
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Components of ROI
Operating and nonoperating activities - Distinction

BALANCE SHEET
Operating assets ..................... OA Financial liabilities .................. FL
Less operating liabilities ........ (OL) Less financial assets ............. (FA)
Net financial obligations......... NFO
Stockholders’ equity................ SE

Net operating assets.............. NOA Net financing ................ NFO + SE

 8-20

EXCELL CORPORATION
Income Statements
For Years Ended December 31, Year 8, Year 9
($ thousands) Year 8 Year 9

Sales $ 1,636,298 $ 1,782,254

Cost of goods sold and operating
expenses $ 1,473,293 $ 1,598,679

Operating profit $ 163,005 $ 183,575

Interest expense $ 21,825 $ 20,843

Pretax profit $ 141,180 $ 162,732

Tax expense $ 52,237 $ 58,584

Net income $ 88,943 $ 104,148

 8-21
EXCELL CORPORATION
Balance Sheets
At December 31, Year 8, Year 9
($ thousands) Year 8 Year 9
Assets

Cash $ 115,397 $ 71,546

Marketable securities $ 38,008 $ 43,854

Accounts receivable, net $ 177,538 $ 182,859

Inventories $ 204,362 $ 256,838

Total current assets $ 535,305 $ 555,097

Investment in unconsolidated
subsidiaries $ 33,728 $ 62,390

Marketable securities $ 5,931 $ 56,997

Property, palant & equipment, net $ 1,539,221 $ 1,633,458

Goodwill $ 6,550 $ 6,550

Total long-term assets $ 1,585,430 $ 1,759,395

Total assets $ 2,120,735 $ 2,314,492

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Year 8 Year 9
Liabilities ($ thousands) ($ thousands)
Notes payable $ 7,850 $ 13,734
Accounts payable $ 138,662 $ 155,482
Taxes payable $ 24,370 $ 13,256
Current maturities of long-term debt $ 30,440 $ 33,822
Total current liabilities $ 201,322 $ 216,294

Long-term debt $ 507,329 $ 473,507

Pension and OPEB liabilities $ 743,779 $ 852,237
Total long-term liabilities $ 1,251,108 $ 1,325,744

Equity
Common stock $ 413,783 $ 413,783
Additional paid-in capital $ 19,208 $ 19,208
Retained earnings $ 436,752 $ 540,901
Treasury stock $ (201,438) $ (201,438)
Total stockholders' equity $ 668,305 $ 772,454
Total liabilities and equity $ 2,120,735 $ 2,314,492
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Net Operating Assets

Year 8 Year 9
Cash $ 115,397 $ 71,546
Accounts receivable, net $ 177,538 $ 182,859
Inventories $ 204,362 $ 256,838
Investment in unconsolidated subsidiaries $ 33,728 $ 62,390
Property, palant & equipment, net $ 1,539,221 $ 1,633,458
Goodwill $ 6,550 $ 6,550
Total operating assets $ 2,076,796 $ 2,213,641
Accounts payable $ 138,662 $ 155,482
Taxes payable $ 24,370 $ 13,256
Pension and OPEB liabilities $ 743,779 $ 852,237
Total operating liabilities $ 906,811 $ 1,020,975
Net operating assets $ 1,169,985 $ 1,192,666
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Latihan Pertemuan 12
SIDO_LKT_Des_2015
(Lihat Situs Kuliah - Pertemuan 6)
1. Hitung Operating Assets, Operating
Liabilities, dan Net Operating Assets 2015,
2014 & 2013
2. Buktikan bahwa NOA = NFO + SE untuk
setiap tahun