Professional Documents
Culture Documents
Statement
Analysis
K.R. Subramanyam
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
8-2
8
CHAPTER
8-3
•• Return
Return onon invested
invested capital
capital (ROIC)
(ROIC) oror
Return
Return onon Investment
Investment (ROI)
(ROI) is
is an
an important
important
joint
joint analysis
analysis
8-4
••Riskier
Riskierinvestments
investmentsexpected
expectedto
toyield
yieldaahigher
higherROI
ROI
••ROI
ROIimpacts
impactsaacompany’s
company’sability
ability
to
tosucceed,
succeed, attract
attractfinancing,
financing,
repay
repaycreditors,and
creditors,and reward
rewardowners
owners
8-5
•• 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 onon 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
user’s different
perspectives
8-11
Components of ROI
Alternative Measures of Invested Capital
Common Measures:
• Stockholders’ Equity
8-12
Components of ROI
Net Operating Assets
•• Perspective
Perspectiveis
isthat
thatof
of the
thecompany
company
as
asaawhole
whole
Calledreturn
•• Called return on
on net
net operating
operating
assets
assets (RNOA)
(RNOA)
RNOA:
RNOA:
measures
measuresoperating
operatingefficiency/
efficiency/
performance
performance
reflects
reflects return
return on
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 onon equity
equity holder
holder
return
return
•• Excludes
Excludes all
all debt
debt financing
financing andand
preferred
preferred equity
equity
net income less preferred dividends
average common equity
8-14
Components of ROI
Computing Invested Capital
Components of ROI
Adjustments to Invested Capital and Income Numbers
Many
Manyaccounting
accounting numbers
numbers require
require
analytical
analyticaladjustment—see
adjustment—seeprior
priorchapters
chapters
Some
Somenumbers
numbersnot
notreported
reported in
in financial
financial
statements
statementsneed
need to
tobe
beincluded
included
Such
Such adjustments
adjustmentsarearenecessary
necessaryfor for
effective
effective analysis
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 = net operating assets
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
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 stockholder’s equity less preferred
stock
8-19
OA = operating assets
OLLEV = operating liabilities leverage ratio
(operating liabilities / NOA)
8-21
NOPAT
Operating profit margin (OPM) =
Sales
Sales
average net operating assets
8-28
Disaggregating ROCE
8-32
•• Assumes
Assumesearnings
earningsretention
retention
and
and aaconstant
constant dividend
dividend
payout
payout
•• Assesses
Assessescommon
commonequity
equity
growth
growthrate
ratethrough
through
earnings
earningsretention
retention
8-35
Assumes
Assumesinternal
internal growth
growth
depends
depends onon both
bothearnings
earnings
retention
retention and
and return
return earned
earned on
on
the
theearnings
earningsretained
retained