M5 Performance Management: Part 2 Flashcards
Formula for ROI (2)
ROI =
Income / investment capital OR
Profit margin * Investment turnover
Income/Sales * Sales/Invested capital
Formula for ROA (2)
Net income / avg total assets
OR
Net income/sales * sales/assets
Profit margin * asset turnover
Limitations on ROI (thus residual income RI may be superior)
-ST Focus
-Disincentive to invest (manager focus on ROI for bonuses etc.)
Formula for Return on Equity ROE
Net income / equity
What is the 3 step DuPont Model ROE
1.) Net Profit Margin
Net Income / Sales
2.) Asset turnover
Sales/assets
3.) Financial leverage
assets/equity
Formula for DuPont Model / ROE (2)
Net Profit Margin * Asset Turnover * Financial leverage
net income / sales * sales/assets * assets/equity
OR
ROA * assets/equity
What does the extended dupont model include? (3)
1.) Tax burden
Net income / pretax income
2.) Interest burden
Pretax income / EBIT
3.) Operating income margin
EBIT / sales
Extended Dupont ROE formula
Tax burden * interest burden * EBIT margin * Asset turnover * financial leverage
Financial leverage formula
Assets / Equity
Formula for Residual Income RI
Value added on per share basis (want positive)
NI - required return
required return = NBV (equity) * hurdle rate
What is the optimal rate to use for RI?
the target return set by company’s management
What is the formula for Economic Value Added?
Net operating profit after taxes (NOPAT) - required return
Required return = Investment * WACC
How to calculate NOPAT (net operating profit after taxes)
EBIT * (1-T)
Investment turnover formula
Sales / avg investment
A profitability measure that can be used to evaluate the efficiency of asset usage and management, and the effectiveness of business strategies to create profits
Return on assets
