Drivers of profitability Flashcards
what is PM formula
PM=NOPAT/SALES
What is ATO formulas
ATO= SALES/NOA ATO = SALES/(OA-OL)
What are financial liabilities
Borrowings from debtholders and issuers
What are financial assets
Invest in short-term securities or other interest-bearing paper and deposits
What are operating assets
Assets invested to produce products for sales
What are operating liabilities
Operating credit that suppliers offer to finance operating assets (non interest bearing)
What is first-level breakdown in the DuPont approach
ROE= ROA x EM
Net income/total assets x total assets/equity
What is the second-level breakdown for the DuPont approach
ROE = PM x ATO x EM
Net income/sales x sales/total assets x total assets/equity
What is another formula for the equity multiplier other than total assets/equity
1/(1- total debt ratio)
How to do variance analysis
4 ROE formulas
ROE0 = PM0 x ATO0 x EM0
ROE0’ = PM1 x ATO0 x EM0
ROE0” = PM1 x ATO1 x EM0
ROE1 = PM1 x ATO1 x EM1
What are the limitations for the Dupont approach
Less informative - doesn’t distinguish operating and finance items
Reflect only the positive effect of financial leverage on ROE
What is the reformulated balance sheet
NOA = NFO + OE
What is the modified DuPont approach
ROE = RNOA + (RNOA - NBC) x FLEV
What is ROE formula
Net income/ equity
What is RNOA formula
Return on net operating assets
NOPAT/NOA
What is NBC formula
Net borrowing costs
Net financial expenses after tax/NFO
What is FLEV formula
Financial leverage
NFO/ equity
Dupont approach what is the third level breakdown for PM
Net sales Less cost of goods sold Less operating expenses Less net interest expense Less income tax
As a percentage of net sales and compare to year before
What is the third level breakdown PM in dupont approach
Link to common sized income statements
PM = Net income/sales = (sales-COGS - Operating Expenses - Interest expense - TAX)/ Sales
