Chapter 3 - ROA + ROE Flashcards
How is Return on Net Operating Assets (ROA) calculated?
ROA = e = Income on Operating Assets/Net Operating Assets
Where is NOA and IOA found?
NOA is found in the balance sheets
IOA is found before financial income and after amortization, so the suspect is EBIT, however, taxes are not yet subtracted, which they should be
How is the Return on Equity (ROE) calculated?
ROE = k = Income Of Equity/Equity
How is Equity and IOE found?
Equity is found in the balance sheets
IOE should be very close to the net income, however, exceptional income from extraordinary activity should be cut out - this is the shareholders’ return.
How is the interest rate calculated?
i=I(1−t)/FD
1-t = interests are tax deductible, the tax rate is therefore subtracted. I = interests FD = financial debts
What is another way to calculate the ROE?
k= (IOE/sales)∗(Sales/NOA)∗(1+FD)/E)
k = Profitabilityturnovergearing (leverage)
How can you calculate the effect that leverage has on equity?
k= e + (e−i)∗(FD/E)
How is risk and return calculated with debt?
Probability is multiplied with k or e and added to a total.
k or e is squared to k^2 or e^2
probability is multiplied with k^2 or e^2 and added to a total
Variance is calculated: Var(k) = E(k^2) - E^2(k)
The square root of the variance is found.
How can IOE be calculated from operating profits?
Operating profit + financial revenues = NOI
NOI * T = NOPAT
NOPAT - interests*(1-T) = IOA
NOPAT = EBIT*(1-T) - if there is no financial revenues or exceptional income
How is the effective tax rate calculated?
T = income tax/(OP+FR-I)
How do you calculate the operating profitability?
IOA/sales
How do you calculate the turnover of assets?
sales/NOA
