Competitive Analysis Flashcards
Competitive analysis includes?
- Conventional profitability/return
- Valued based manage
- Target pricing markups
- Price elasticity
What is ROI?
= Net income / total assets
What is the Dupont approach to ROI?
ROI = Return on Sales X Asset Turnover
ROS (Profit margin)= NET INCOME / SALES
ASSET TURNOVER (capital turnover) = SALES/TOTAL ASSET
What is the focus on ROI and weaknesses?
Consistent with external financial analysis used to evaluate broad performance.
Weakness:
- Suffers from accrual distortions
- Suffers from the diluted hurdle rate problem
What is the problem with accrual distortions?
Accrual accounting is arbitrary
Concerned with compliance not with economic performance
Allows by FASB, SEC, IRS are often arbitrary (SL or accelerate depreciation, FIFO, LIFO, etc)
What is residual income?
Designed to eliminate diluted hurdle rate problem
Is generier form of economic profit
Recognizes the cost of capital and expresses answer in dollars (rather than a rate)
= OPERATING INCOME - (REQUIRED RATE OF RETURN X INVESTED CAPITAL)
What is valued based management? Two most popular metrics.
Two most popular metrics:
- EVA
NOPART- WACC X (Total Assets - Current Liabilities) - CFROI
(CFO- ED)/CASH INVESTED
EVA is specific form of RI that is often used for incentive compensation and investor relations.
What are VBM themes & Concepts)
Accrual based metrics are discredited
Cost of capital is emphasized (ECONOMIC income view)
Shareholder value as the primary element of interest is common (protecting shareholder wealth)
VMB to strategy and linking to drives of success is common
What is price elasticity?
% Change in quantity demanded / % change in price
If the price is great than 1, it is elastic
Less than one, inelastic
What is the key to understanding markups?
The key to properly analyzing markups is to understand what the markup is based on.
Focus on specific language that communicates the basis for markup
