Statement
Analysis
K R Subramanyam
John J Wild
McGraw-Hill/Irwin
CHAPTER
8-2
8-3
8-4
8-5
8-6
Management
Management is
is
responsible
responsible for
for all
all
company
company activities
activities
ROI
ROI is
is aa measure
measure of
of managerial
managerial
effectiveness
effectiveness in
in business
business activities
activities
ROI
ROI depends
depends on
on the
the skill,
skill, resourcefulness,
resourcefulness,
ingenuity,
ingenuity,and
and motivation
motivation of
of management
management
8-7
ROI
ROI is
is an
an indicator
indicator of
of company
company
profitability
profitability
ROI
ROI relates
relates key
key summary
summary
measures:
measures: profits
profits with
with financing
financing
ROI
ROI conveys
conveys return
return on
on invested
invested
capital
capital from
from different
different financing
financing perspectives
perspectives
8-8
ROI
ROI assists
assists managers
managers with:
with:
Planning
Planning
Budgeting
Budgeting
Coordinating
Coordinating activities
activities
Evaluating
Evaluating opportunities
opportunities
Control
Control
8-9
Components of ROI
Return on invested capital is defined as:
Income
Invested Capital
8-10
Components of ROI
Invested Capital Defined
No universal measure
of invested capital
Different measures of
invested capital reflect
users different
perspectives
8-11
Components of ROI
Alternative Measures of Invested Capital
Common Measures:
8-12
Components of ROI
Net Operating Assets
Perspective
Perspectiveis
isthat
that of
of the
thecompany
company
as
asaawhole
whole
Called
Called return
return on
on net
net operating
operating
assets
assets (RNOA)
(RNOA)
RNOA:
RNOA:
measures
measuresoperating
operatingefficiency/
efficiency/
performance
performance
reflects
reflectsreturn
returnon
onnet
net operating
operating
assets
assets(excluding
(excluding financial
financial
assets/liabilities)
assets/liabilities)
8-13
Components of ROI
Common Equity Capital
Perspective
Perspective is
is that
that of
of common
common
equity
equity holders
holders
Captures
Captures the
the effect
effect of
of leverage
leverage
(debt)
(debt) capital
capital on
on equity
equity holder
holder
return
return
Excludes
Excludes all
all debt
debt financing
financing and
and
preferred
preferred equity
equity
net income less preferred dividends
average common equity
8-14
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
8-15
Components of ROI
Adjustments to Invested Capital and Income Numbers
Many
Manyaccounting
accountingnumbers
numbersrequire
require
analytical
analyticaladjustmentsee
adjustmentseeprior
prior chapters
chapters
Some
Somenumbers
numbersnot
notreported
reported in
in financial
financial
statements
statementsneed
need to
tobe
beincluded
included
Such
Suchadjustments
adjustmentsare
arenecessary
necessaryfor
for
effective
effectiveanalysis
analysisof
ofreturn
returnon
oninvested
invested
capital
capital
8-16
Components of ROI
Return on Net Operating Assets -- RNOA
NOPAT
NOPAT
(Beginning
(Beginning NOA
NOA ++ Ending
Ending NOA)
NOA) // 22
Where
NOPAT = Operating income x (1- tax rate)
NOA
8-17
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
8-18
Components of ROI
Return on Common Equity -- ROCE
Net
Net income
income -- Preferred
Preferred dividends
dividends
(Beginning
(Beginning equity
equity ++ Ending
Ending equity)
equity) // 22
Where
Equity is stockholders equity less preferred
stock
8-19
NOPAT
NOPAT
Sales
Avg. NOA
Sales Avg. NOA
Operating Profit margin: measures operating profitability
relative to sales
Operating Asset turnover (utilization): measures effectiveness
in generating sales from operating assets
8-20
OA
= operating assets
OLLEV = operating liabilities leverage ratio
(operating liabilities / NOA)
8-21
8-22
8-23
8-24
8-25
NOPAT
Operating profit margin (OPM) =
Sales
Pretax PM = Pretax sales PM + Pretax other PM
8-26
Selling Expenses
General and Administrative Expenses
8-27
8-28
8-29
8-30
8-31
8-32
8-33
8-34
Assumes
Assumesearnings
earningsretention
retention
and
and aaconstant
constant dividend
dividend
payout
payout
Assesses
Assessescommon
common equity
equity
growth
growthrate
ratethrough
through
earnings
earnings retention
retention
8-35
Assumes
Assumesinternal
internalgrowth
growth
depends
dependson
on both
bothearnings
earnings
retention
retentionand
andreturn
return earned
earned on
on
the
theearnings
earningsretained
retained