财务报表分析答案8.docx

Ch叩ter8ReturnonInvestedCapitalandProfitabilityAnalysisREVIEWReturnoninvestedcapitalisimportantinouranalysisoffinancialstatements.Financialstatementanalysisinvolvesourassessingbothriskandreturn.Thepriorthreechaptersfocusedprimarilyonrisk,whereasthischapterextendsouranalysistoreturn.Returnoninvestedcapitalreferstoacompany'searningsrelativetoboththelevelandsourceoffinancing.Itisameasureofacompany'ssuccessinusingfinancingtogenerateprofits,andisanexcellentmeasureofoperatingperformance.Thischapterdescribesreturnoninvestedcapitalanditsrelevancetofinancialstatementanalysis.Wealsoexplainvariationsinmeasurementofreturnoninvestedcapitalandtheirinterpretation.Wealsodisaggregatereturnoninvestedcapitalintoimportantcomponentsforadditionalinsightsintocompanyperformance.Theroleoffinancialleverageanditsimportanceforreturnsanalysisisexamined.Thischapterdemonstrateseachoftheseanalysistechniquesusingfinancialstatementdata.OUTLINE ImportanceofReturnonInvestedCapitalMeasuringManagerialEffectivenessMeasuringProfitabilityMeasuringforPlanningandControl ComponentsofReturnonInvestedCapitalDefiningInvestedCapitalAdjustmentstoInvestedCapitalandIncomeComputingReturnonInvestedCapital AnalyzingReturnonNetOperatingAssetsDisaggregatingReturnonNetOperatingAssetsRelationbetweenProfitMarginandAssetTurnoverProfitMarginAnalysisAssetTurnoverAnalysis AnalyzingReturnonCommonEquityDisaggregatingReturnonCommonEquityFinancialLeverageandReturnonCommonEquityAssessingGrowthinCommonEquityANALYSISOBJECTIVES Describetheusefulnessofreturnmeasuresinfinancialstatementanalysis. Explainreturnoninvestedcapitalandvariationsinitscomputation. Analyzereturnonnetoperatingassetsanditsrelevanceinouranalysis. Describedisaggregationofreturnonnetoperatingassetsandtheimportanceofitscomponents. Describetherelationbetweenprofitmarginandturnover. Analyzereturnoncommonshareholders'equityanditsroleinouranalysis. Describedisaggregationofreturnoncommonshareholders'equityandtherelevanceofitscomponents. Explainfinancialleverageandhowtoassessacompany'ssuccessintradingontheequityacrossfinancingsources.QUESTIONS1. Thereturnthatisachievedinanyoneperiodontheinvestedcapitalofacompanyconsistsofthereturns(andlosses)realizedbyitsvarioussegmentsanddivisions.Inturn,thesereturnsaremadeupoftheresultsachievedbyindividualproductlinesandprojects.Awell-managedcompanyexercisesrigorouscontroloverthereturnsachievedbyeachofitsprofitcenters,anditrewardsthemanagersonthebasisofsuchresults.Specifically,whenevaluatingnewinvestmentsinassetsorprojects,managementwillcomputetheestimatedreturnsitexpectstoachieveandusetheseestimatesasabasisforitsdecisiontoinvestornot.2. Profitgenerationisthefirstandforemostpurposeofacompany.Theeffectivenessofoperatingperformancedeterminestheabilityofthecompanytosurvivefinancially,toattractsuppliersoffunds,andtorewardthemadequately.Returnoninvestedcapitalistheprimemeasureofcompanyperformance.Theanalystusesitasanindicatorofmanagerialeffectiveness,and/orameasureofthecompany'sabilitytoearnasatisfactoryreturnoninvestment.3. Iftheinvestmentbaseisdefinedascomprisingnetoperatingassets,thennetoperatingprofit(e.g.,beforeinterest)aftertax(NOPAT)istherelevantincomefiguretouse.Theexclusionofinterestfromincomedeductionsisduetoitsbeingregardedasapaymentfortheuseofmoneyfromthesuppliersofdebtcapital(inthesamewaythatdividendsareregardedasapaymenttosuppliersofequitycapital).NOPATistheappropriateamounttomeasureagainstnetoperatingassetsasbothareconsideredtobeoperating.4. First,themotivationforexcludingnonproductiveassetsfrominvestedcapitalisbasedontheideathatmanagementisnotresponsibleforearningareturnonnon-operatinginvestedcapital.Second,theexclusionofintangibleassetsfromtheinvestmentbaseisoftenduetoskepticismregardingtheirvalueortheircontributiontotheearningpowerofthecompany.UnderGAAP,intangiblesarecarriedatcost.However,iftheircostexceedstheirfutureutility,theyarewrittendown(ortherewillbeanuncertaintyexceptionregardingtheircarryingvalueintheauditor'sopinion).Theexclusionofintangibleassetsfromtheassetbasemustbebasedonmoresubstantialevidencethanamerelackofunderstandingofwhattheseassetsrepresentoranunsupportedsuspicionregardingtheirvalue.Thisimpliesthatintangibleassetsshouldgenerallynotbeexcludedfrominvestedcapital.5. Thebasicformulaforcomputingthereturnoninvestmentisnetincomedividedbytotalinvestedcapital.Wheneverwemodifythedefinitionoftheinvestmentbaseby,say,omittingcertainitems(liabilities,idleassets,intangibles,etc.)wemustalsoadjustthecorrespondingincomefiguretomakeitconsistentwiththemodifiedassetbase.6. Therelationofnetincometosalesisameasureofoperatingperformance(profitmargin).Therelationofsalestototalassetsisameasureofassetutilizationorturnover-ameansofdetermininghoweffectively(intermsofsalesgeneration)theassetsareutilized.Bothofthesemeasures,profitmarginaswellasassetutilization,determinethereturnrealizedonagiveninvestmentbase.Salesareanimportantfactorinbothoftheseperformancemeasures.7. Profitmargin,althoughimportant,isonlyoneaspecto