Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Financial Statement Analysis K R Subramanyam John J Wild

8-2 8 CHAPTER Profitability Analysis

8-3 What are its implications ? To whom is it important ? Net income margin Net income Revenue =X 100 (%) BASIC OF PROFITABILITY ANALYSIS

8-4 What are its implications ? To whom is it important ? Gross margin percent Gross Profit Revenue =X 100 (%) BASIC OF PROFITABILITY ANALYSIS

8-5 What are its implications ? To whom is it important ? Asset turnover Revenue Average assets =(times) BASIC OF PROFITABILITY ANALYSIS Profit Assets Revenue

8-6 Return on assets (ROA) Net income Average assets =X 100 (%) BASIC OF PROFITABILITY ANALYSIS What are its implications ? To whom is it important ?

8-7 BASIC OF PROFITABILITY ANALYSIS ROA Net income Revenue = X Average assets Revenue ROA = Net income margin X Asset turnover

8-8 8 Example 1 Chỉ tiêuCompany ACompany B Revenue$6,000,000 Total assets1,200,0006,000,000 Net Income125,000600,000 The following information is obtained from the financial statements of two retail companies. One company is a gift shop in a resort area; the other company is a discount household goods store. Neither company has any debt. Indicate which company is more likely to be the gift shop and which is the discount household goods store.

8-9 Basic of profitability analysis Net income margin Asset turnover

8-10 Return on equity (ROE) Net income Average equity =X 100 (%) BASIC OF PROFITABILITY ANALYSIS

8-11 ROE Net income Revenue = X Average assets Revenue X Average equity Average assets ROE = Net income margin X Asset turnover X Asset-to-equity ratio Profitability Efficiency Financial leverage (risk) BASIC OF PROFITABILITY ANALYSIS

8-12

8-13 Cautions with ROE ROE of company A is 30%, ROE of company B is 20%. Did Company A perform better than company B ? Is the price of company A’s share higher than the price of company B’s share ?

8-14 Example 2 Year 2009VCSDACDTCHPS 1.Net income margin (%) ROA (%) ROE (%) ROI (%) Total Liabilities-to-Total assets ratio Debt-to-equity ratio

8-15 Return on invested capital (ROI) Return on invested capital is defined as: Alternatives of invested capital: –Net operating assets –Stockholders’ equity Income Invested Capital

8-16 Return on net operating assets (RNOA) NOPAT (Beginning NOA + Ending NOA) / 2 NOPAT (Beginning NOA + Ending NOA) / 2 Where NOPAT = Operating income x (1- tax rate) NOA = net operating assets (excluding financial assets/liabilities)

8-17 Return on net operating assets (RNOA) BALANCE SHEET Operating assets OA Less operating liabilities (OL) Net operating assets NOA Financial liabilities FL Less financial assets (FA) Net financial obligations NFO Stockholders’ equity SE Net financing NFO + SE Operating and nonoperating activities - Distinction

8-18 Disaggregating RNOA RNOA = Operating Profit margin x Operating Asset turnover Operating Profit margin: measures operating profitability relative to sales Operating Asset turnover (utilization): measures effectiveness in generating sales from operating assets

8-19 Return on common equity (ROCE) Net income - Preferred dividends (Beginning equity + Ending equity) / 2 Net income - Preferred dividends (Beginning equity + Ending equity) / 2 Where Equity is stockholder’s equity less preferred stock

8-20 Disaggregating ROCE

8-21 Disaggregating ROCE Alternate View of ROCE Disaggregation

8-22 Analyzing Return on Common Equity-ROCE Assessing Equity Growth Assumes earnings retention and a constant dividend payout Assesses common equity growth rate through earnings retention Assumes earnings retention and a constant dividend payout Assesses common equity growth rate through earnings retention

8-23 Analyzing Return on Common Equity-ROCE Assessing Equity Growth Assumes internal growth depends on both earnings retention and return earned on the earnings retained