Integration of FSA techniques

Question 1

Dupont Formulas for ROE (Easy/med/hard)

Answer 1

ROE = ROA x Leverage
ROE = NPM x Asset Turnover x Leverage
ROE = EBT Margin x (1-tax rate) x AT x Leverage

ROE = NI/EBT (tax burden) X EBT/EBIT (interest burden) X EBIT/SALES X SALES/AVG. ASSETS X AVG. ASSETS / AVG. EQUITY

Question 2

What is Asset turnover?

Answer 2

Sales / Assets -> should be average assets

Question 3

What is ITO, RTO and Payables turnover? Also think about days and CCC.

Answer 3

ITO = COGS / Avg. Inventory
RTO = Revenue / Avg. Receivables
Payables = COGS / Avg. Payables

365/these ratios for the days

CCC = INV days + REC days - Payables days

Question 4

How do i work out whether the company is growing a segment or holding back?

Answer 4

Measure the % of capex to the % of total assets. if > 1 then growing. if < 1 then can be considered to be less of a priority.

Question 5

Balance Sheet Accruals ratio

Answer 5

NOAt - NOAt-1 / (Average NOA)

Question 6

Cash Flow Accruals ratio

Answer 6

[NIt - (CFOt + CFIt)] / (Average NOA)

Question 7

With the BS accruals and Cashflow accruals - what does a declining trend imply?

Answer 7

A declining trend implies strengthening earnings quality for these ratio.

Question 8

Does the absolute value of the level of accruals matter when assessing cash flow quality?

Answer 8

Yes - the absolute levels matter. High absolute levels are a concern for the analyst investigating.

Question 9

EBIT is larger than CFO - is this an issue?

Answer 9

Yes - ideally cash flows should match earnings.