FSA- Unit 3 Flashcards
Return on Equity
-most common analysis metric used by managers and investors alke
-relates net income and average stockholder’s equity
-measures return from the perspective of the company’s stockholders
ROE= Net income / Avg. stockholders’ equity
S&P 500 accounts for __% of the US stock market capitalization. Is 500 of the largest US ______ traded companies. US based companies are selected based on market ___, _______, ____-_____ profitability, and _____ volume.
75, largest
market cap, industry, long-term profitability, and trading volume.
Two methods to measure ROE drivers:
- traditional Dupont Analysis that disaggregates ROE into components of ________, __________, and ________.
- ROE analysis with an ________ _____ that ditinguishes btwn operating and nonoperating activites
measures return to the ______ stockholders
- profitability, productivity, and leverage.
- operating focus
common
operating activites drive __________ _____
shareholder value
Dupont Disaggregation of ROE
ROE = Net income/ avg. stockholders equity = ROA * FL (Financial Leverage)
ROA = NI / Avg. total assets
FL = Avg. total assets / Avg. stockholders’ equity
ROE reflects both:
- company ______ (as measured by ROA)
- How assets are _______ (measured by Financial Leverage)
-performance
-financed
ROE is higher when there is more _____ and less _____ for a given level of assets.
Trdeoff - greater debt means ______ ______ for the company
- more debt aand less equity
- higher risk
ROA (Return on Assets)
- this return includes both ________ (numerator) and total company assets
- to earn a high ROA, the company must be _____ and _____ _____ (hold the lowest level of assets possible to achieve the desired proft)
-ROA analysis enourages managers to focus on both _____ ______ and ______ _____
= NI/Avg. total assets
- profitability
- profitable and manage assets
- income statments and balance sheet
Financial Leverage
- meausres the relative use of ___ versus ____ to finance the company’s assets
-important because debt is a contractual obligation and failure to repay principal or interest can result in ____ repercussions or even ______
-higher _______ ______ means higher ____ and _____ ______
= Avg. total assets / Avg. stockholders’ equity
- debt versus equity
-legal, brankruptcy
- financial levergage …. debt and interest payments
Preferred Stock
ROCE = Net income - preferred dividens / Avg. stockholders’ euity - avg. preferred equity
ROE measures return to the _______ (_______ _______) stockholders
controlling (parent company)
Noncontrolling interest: must use the correct line items
ROE=
ROE = net income attributable to company shareholders/ avg. equity attributable to comapny shareholders
Disaggregation of Return on Assets
ROA = Net income / Avg. toal assets = PM * AT
PM (Profit margin) = Net income/ sales
— what company earns on each sales dollar
AT (Asset Turnover) = sales / avg. total assets
Managers can increase ROA by:
1.
2.
- Increase PM: increase profitability for a given level of assets
- Increase AT: reduce assets while still generating same profit level
(or both!)
Analysis of Profitability - Gross Profit Margin
= Gross Profit / sales
- Gross Profti Margin influence by both the _____ price of a company’s prodicts and the _____ to make or buy those products
- ___ and _____ gross profit better
- price & costs
- high & increasing
low or decreasing gross profit margin signals more _______ or less _____ for the company’s produtcs
more competition or less demand
Analysis of Profitability - Operating Expense Margin
- measures general operating ____ for each sales dollar
- compare margins over ____ and ____
= operating expenses / revenue
- cost
- time and competitors
Analysis Of Profitability and Productivity Image
look at Module 3 slide show diagram
Cash Converstion Cycle
- avg. days to buy inventory on credit (accounts payable)
- sell inventories of credit (accounts receivable)
- collect the receivables
- pay the accounts payables
CCC = ____ + ____ - ______
CCC = DSO + DIO + DPO
DSO
= 365/ Accounts receivable turnover
DIO
= 365 / Inventory turnover
DPO
= 365 / Accounts payable turnover
Generally, companies prefer a _____ CCC. But does depend on _____ to determine if good.
lower
industry
PPE turnover =
sales / avg. PPE
Improving PPE is not EASY; entails:
- divesting of ______ assets or entire business lines
- _____ ventures to share assets
- _____ production facilities
- Key is to be ______ in approving capital appropriation request
- unproductive
- joint
- selling
- proactive
After sale, the original ______ and _________ _________ of the asset sold are removed from the balance shett by journal entry.
_______: accumulated depreciation of asset sold
________: original cost of asset
cost … accumulated depreciation
Debit
Credit
Analysis of financial leverage involves:
1.
2.
- borrowed money relative to equity capital
- profit or cash flow relative to required debt payments
Total Liabilities to equity =
Total Liabilities to equity = total liabilities/ total equity
Times interest earned =
Times interest earned = earnings before interest and tax / interest expense, gross
Adjusted ROA =
Adjusted ROA = Net Income + [ Net Interest expense * (1-Statutory tax rate)] / Avg. total assets
Adjusted ROA made by adding back the ______-_____ interest expense. (Net of any interest _______ or other ________ expense or revenye reported after operating income)
after-tax
revenue …. nonoperating
ROE Operating Focus — ROE=
ROE = operating return + nonoperating return (financing or investing activities)
Return on Net Operating Assets (RNOA) =
RNOA = Net operating profit after tax (NOPAT) / Avg. net operating assets (NNOA)
Net Operating Profit After Tax (NOPAT)
NOPAT = Net operating profit before tax (operating profit) - tax on operating profit
NOPBT (operating income)
NOPBT = sales - operating expenses
net operating assets =
net operating assets = operating assets - operating liabilities
net nonoperating obligations (NNO) =
net nonoperating obligations (NNO) = nonoperating liabilities - operating assets
tax on operating profit =
tax on operating profit = tax expense + (pretax net nonoperating expenses * satutory tax rate)
- part in parentheses is tax sheilf
___ ________, which are the taxes that a company saves by having tax-deductible nonoperating expenses
By definition, the taxes saved (by the tax shield) do not relate to ______ profits. So we must add back that ____ _____ to total tax expense to compute the tax on operating profit
Our starting point to determine tax on operating profit, is the _____ net nonoperating expenses
- tax shield
- operating
- tax shielf
-PRETAX
(example on Onenote)
Analyst adjustments 3.3 - Tax rate for computing NOPAT
onenote
Return on Net Operating Assets (RNOA)
meausres operating returns
RNOA = NOPAT / Avg. NOA
Disaggregate RNOA
RNOA = NOPAT / Avg. NOA = NOPM x NOAT
NOPM (net operating profit margin)
= NOPAT / sales
NOAT (net operating asset turnover)
= sales / avg. NOA
NOPM reveals how much …
operating profit the company earns from each sales doller
NOPM = 17.68%, interpretation?
For every dollar of sales, the company earns nearly 18 cents of operating profit after all expenses, including tax
NOAT measure the …
productivity of the company’s net operating assets
NOAT = 0.70, interpretation
for every dollar of net operating assets, the company earns 70 cents of sales revenue
NOPM = NOPAT/sales is affected by
- gross profit
- operating expenses
- competition
NOAT = sales/ avg NOA - can be increased by
either inc. sales for a given level of operating assets or by reducing the amount of operating assets while generating the same sales, or both.
reducing operating working capital (easier)
using corporate alliances, outsourcing, and special purpose entities to reduce operating assets
_____ _____ expresses financial statements in ratio form.
- income statement: as percent of net saes
- balance sheet: as percent of totoal assets
vertical analysis
_______-_______ financial statements reduce all figures to a comparable figure, such as a percentage of sales or assets.
common-size
__________ ________ is the scrutiny of financial data across time. To analyze and predict performance.
Formula?
horizontal analysis
(current balance - pervious balance) / previous balance
Factors that limit usefulness:
- GAAP - omit many assets
- company changes
- conglomerate effects (consolidated statements are challening to analyze)
- fuzzy view - ratio reduce to a signle number, doesn’t capture all qualitative aspects of the company.
