CHAPTER 17:
LENDING TO BUSINESS
FIRMS & PRICING
BUSINESS LOANS
1
AGENDA
I. Type of business loans
II. Analysing business loan
requests
III.Pricing business loans
2
I. Type of business loans:
Short and Long term
1.
Short-term loan:
1) Working capital loans
2) Interim construction financing
3) Securities dealer financing
4) Retailer and Equipment Financing
5) Asset-based financing
6) Syndicated loans
3
I. Type of business loans:
1. Short-term loan
1) Working capital loans:
Up to one year, can be renewed
Normally support inventory
purchasing
Usually a credit line with a fluctuating
interest rate.
Commitment fee on the full credit line
Compensating deposit balance
Secured by receivable or inventory
4
I. Type of business loans:
1. Short-term loan
6) Syndicated Loans (SNCs):
Provide by a group of lenders to reduce
risk on large loans
May have a form of a credit line, LIBOR
Syndicated loans can be traded on the
secondary market
Usually has medium credit quality or even
classified credit
Held by non-bank lenders who expect
exceptional returns
5
LIBOR 6TH MAR, 2023: 5.008%
6
I. Type of business loans:
Short and Long term
2. Long-term loans:
1) Term business loans
2) Revolving credit financing
3) Long-term project loans
4) Leveraged buyouts (LBOs)
7
I. Type of business loans
2. Long-term loans
1)
Term business loans
For long-term investment
 Construction of physical facilities, purchasing
equipment
Schedule of payment is usually structured as the
business’s cash flows
 “Blind spots”: no instalment at the beginning
 “Bullet loan”: Principle may be paid at the end
Secured by fixed asset
8
I. Type of business loans
2. Long-term loans
2) Revolving credit financing
For borrowers with unexpected cash
flows
Provide a revolving credit line: promise to
lend up to a maximum amount
Interest fluctuates
Charge commitment fee upon the use of
credit line
Usually without collateral
Up to five years
9
I. Type of business loans
2. Long-term loans
3) Long-term project loans
Finance the construction of fixed assets
designed to earn future cash flows to repay
 Oil refineries, power plants, harbour
facilities
The riskiest loan
 Large amounts, material shortage,
regulations, interest changes
On a recourse basis
 Sponsor of the projects must pay if the
project fails
10
II. Analyzing Business Loan
Applications
b. Ratio
analysis
a. Common
size analysis
MEASURE
AND
EVALUATE
- Finance
- Operating
11
Review:
The Four Key Financial Statements
1. INCOME STATEMENT
2. BALANCE SHEET
3. CASH FLOWS STATEMENT
4. STATEMENT OF CHANGE IN
SHAREHOLDERS’ FINANCIAL
STATEMENTS
5. NOTES TO THE FINANCIAL
STATEMENTS
12
Scarlett Income Statements ($000)
Sales revenue
Less: Cost of goods sold
Gross profits
Less: Operating expenses
Selling expense
General and
administrative expenses
Other operating expenses
Depreciation expense
Total operating expense
Operating profits
For the years ended
December2018
31
2019
$3,074
$2,567
2,088
1,711
$986
$856
$100
$108
194
187
35
239
$568
$418
35
223
$553
$303
13
Scarlett Income Statements cont. ($000)
For the years ended December 31
2019
93
$325
94
$231
10
2018
91
$212
64
$148
10
Less: Interest expense
Net profits before taxes
Less: Taxes
Net profits after taxes
Less: Preferred stock dividends
Earnings available for common
stockholders
Earnings per share (EPS)a
$221
$138
$2.90
$1.81
Dividend per share (DPS)b
$1.29
$0.75
aCalculated by dividing the earnings available for common stockholders by the number of shares of common stock
outstanding: 76,262 in 2019 and 76,244 in 2018. Earnings per share in 2019: $221,000 ÷ 76,262 = $2.90; in 2018:
$138,000 ÷ 76,244 = $1.81.
bCalculated by dividing the dollar amount of dividends paid to common stockholders by the number of shares
14of
common stock outstanding. Dividends per share in 2019: $98,000 ÷ 76,262 = $1.29; in 2018: $57,183 ÷ 76,244 = $0.75.
Scarlett Company Balance Sheet ($000)
Assets
Cash
Marketable securities
Accounts receivable
Inventories
Total current assets
Land and buildings
Machinery and equipment
Furniture and fixtures
Vehicles
Other (includes financial leases)
Total gross fixed assets (at cost)
Less: Accumulated depreciation
Net fixed assets
Total assets
2019
$363
68
503
289
$1,223
$2,072
1,866
358
275
98
$4,669
2,295
$2,374
$3,597
2018
$288
December
31
51
365
300
$1,004
$1,903
1,693
316
314
96
$4,322
2,056
$2,266
$3,270
15
3. Statement of Cash Flows
Provides a summary of the
firm’s operating, investment, and
financing cash flows and
reconciles them with cash and
marketable securities changes
during the period.
16
Scarlett Company Statement of Cash Flows
For the Year Ended December 31, 2019
Cash Flow from Operating Activities
($000)
Net profits after taxes
$231
Depreciation
239
Increase in accounts receivable
–138a
Decrease in inventories
11
Increase in accounts payable
112
Increase in accruals
45
Cash provided by operating activities
$500
Cash Flow from Investment Activities
Increase in gross fixed assets
–347
Change in equity investments in other firms
0
Cash provided by investment activities
–$ 347
a As is customary, parentheses are used to denote a negative number, which
in this case is a cash outflow.
17
Scarlett Company Statement of Cash Flows
For the Year Ended December 31, 2019 (cont.)
Cash Flow from Financing Activities
Decrease in notes payable
Increase in long-term debts
−20
56
Changes in stockholders’ equityb
11
Dividends paid
− 108
Cash provided by financing activities
−$ 61
Net increase in cash and marketable
securities
$92
b Retained earnings are excluded here because their change is actually reflected in
the combination of the “net profits after taxes” and “dividends paid” entries.
18
4. Statement of changes in
Shareholders’ equities
Reconciles the net income
earned during a given year, and
any cash dividends paid, with the
change in retained earnings
between the start and the end of
that year
.
19
Scarlett Company Statement of changes in
Shareholders’ Equities
For the Year Ended December 31, 2019
Retained earnings balance (January 1,
2019)
Plus: Net profits after taxes (for 2019)
$1,012
231
Less: Cash dividends (paid during 2019)
Preferred stock
Common stock
Total dividends paid
Retained earnings balance (December
31, 2019)
10
98
$108
$1,135
20
5. NOTE TO THE FINANCIAL
STATEMENTS
Explanatory notes keyed to relevant
accounts in the statements;
They provide detailed information on the
accounting policies, procedures,
calculations, and transactions underlying
entries in the financial statements
21
22
NOTE V.14 – VINAMILK FINANCIAL
REPORT (2021)
23
a. Common size analysis: Common–size FS
Vertical analysis:
• A technique to evaluate changes in financial statement
elements relative to Sales and Asset
 Using Asset and Sales as the base figures
 Computing the percentage of all elements in the
financial statements relative to the base figures
Horizontal analysis:
• A technique used to evaluate trends over times
 Using one-year financial statement figures as a base
year
 Computing percentage increase or decrease relative
to the base year
24
Melcher Company Income Statement
Illustration for common-size analysis
(Absolute dollars)
2013
2012
2010
Revenue from sales
100,000
95,000
91,000
Cost of goods sold
65,000
60,800
56,420
Gross profit
Operating expenses
35,000
34,200
34,580
Selling expenses
General expenses
14,000
16,000
11,400
15,200
10,000
13,650
Total operating expenses
30,000
26,600
23,650
Operating income before
income tax
5,000
7,600
10,930
Taxes related to operation
1,500
2,280
3,279
3,500
5,320
7,651
25
Net Income
Melcher company Vertical common- size analysis
Revenue from Sales
Cost of goods sold
Gross profit
Operating expense
Selling expense
General expense
Total operating
expense
Operating income
before taxes
Tax related to
operations
26
Net income
2013
100%
2012
100%
2011
100%
65
35
64
36
62
38
14
12
11
16
30
16
28
15
26
5
8
12
1.5
2.4
3.6
3.5
5.6
8.4
Melcher company
Horizontal common- size analysis
2013
2012
2011
Revenue from Sales
109.9%
104.4%
100%
Cost of goods sold
115.2
107.8
100%
Gross profit
101.2
98.9
100%
Selling expense
140.0
114.0
100%
General expense
117.2
111.4
100%
Total operating expense
126.8
112.5
100%
Operating income before
taxes
45.7
69.5
100%
Tax related to operations
45.7
69.5
100%
Net income
45.7
69.5
100%
Operating expense
27
Notes!
Prepare for at least 3 years
Notice the abnormal changes and
focus on them by using ratio analysis
28
b. Ratio analysis
• Main ratios:
Liquidity
Leverage
Profitability
Market performance
• Strengths of ratio analysis:
• direct the user’s focus of attention
• highlight areas of good and bad
performance
• identify areas of significant change
• alleviate the problems of size differences
29
Ratio Analysis: Some caution!
a. Avoid first impression
b. Limitation of financial statements
 Book value vs. Market/true
value
c. Include Comparisons analysis
Across time (Time series)
With competitors (Cross
sectional analysis)
With the industry average
30
a) Avoid First Impression!!!
Need for an extremely inquisitive and
enquiring frame of mind.
Some issues will be quickly evident, e.g.
that
• a company has made losses in the past
two years; or
• a large overdraft; or a greatly increased
accounts payable figure, or
• it has a declining sales turnover
31
b) Book Value vs. True Value
Limitation of information on financial
statements
Backward looking
Leave out some current and historical
information, such as human resources, inflation
Managers often choose accounting methods
and estimates that make them look good.
=> Accounts are little more than an indication!
32
Framework for Adjustment
Book Value
Add adjustments for:
(1) business environment
(2) unrecorded events
(3) management bias
= True Value
33
c) Comparisons
i. Across industry (Cross - section analysis)
Compared to those of similar companies
Comparison with industry averages is
beneficial (benchmark analysis)
However, notice the selected industry
ii. Across time (Time series analysis)
 Normally 3 continuous years
iii. Combined analysis:
i. Combines time series and cross-sectional
34
Table 1a: Cross-sectional analysis
Compare with Select Firms and
Industry Average Ratio
Current Quick
ratio ratio
Apple
HP
Computers
Industry
Average
Total
collection
asset
period
turnover
(days)
Inventory
turnover
1.4
1.3
61.6
49.6
0.7
1
0.7
8.8
31.1
1.7
1.5
0.6
21
57
0.8
The data used to calculate these ratios are drawn from the Compustat North American database.
35
Table 1b: Cross-sectional analysis
Compare with Select Firms and
Industry Average Ratio
Current Quick
ratio ratio
Inventory
turnover
Average
Total
collection
asset
period
turnover
(days)
Home Depot
1.3
0.4
4.3
5.3
1.6
Lowe’s
Building
materials
1.3
0.2
3.7
0
1.4
2.8
0.8
3.7
5.3
1.6
36
Table 2a:Cross-sectional analysis
Compare with Select Firms and
Industry Average Ratio
Debt ratio
Net profit
margin %
Apple
0.6
21.20
14.20
35.60
HP
0.7
5.2
8.6
16.4
Computers Industry
0.4
15.6
11.9
32.3
ROA%
ROE%
37
Table 2b: Cross-sectional analysis
Compare with Select Firms and
Industry Average Ratio
Debt ratio
Net profit
margin %
Home Depot
0.5
4
6.5
13.7
Lowe’s
Building
materials
0.4
3.7
5.4
9.3
0.3
4
6.5
13.7
ROA%
ROE%
38
Compare with Select Firms and Industry
Average Ratio (Cont.)
blank
Average
Total
collection
asset
Net
Inventory
period
turnove Debt profit
turnover
(days)
r
ratio margin
Return
on total
assets
Return
on
Price to
common earnings
equity
ratio
Curren
t ratio
Quick
ratio
1.5
1.1
19.9
5.6
2.5
0.5
3.2
8.0
15.7
18.0
1.3
0.7
11.1
7.5
2.4
0.6
2.1
3.1
9.8
20.8
Target
0.9
0.3
5.9
3.9
1.8
0.7
3.8
7.1
24.4
10.7
Walmart
0.9
0.3
9.0
3.7
2.4
0.6
3.5
8.4
20.3
16.3
Merchandis
1.7
0.6
4.1
3.7
2.3
0.5
1.5
4.9
10.8
37.1
Whole
Foods
Market
Grocery
stores
e stores
39
Notice when comparing ratio:
(1) Uniformity
Comparison is possible only if there is
uniformity
 An awareness of any differences in
international accounting policies
 Uniformity in the preparation of accounts
 Uniformity fiscal year-end
40
Notice when comparing ratios
(2)Need of definition
It is preferable to use audited financial statements
Implications of any given ratio requires a clear
definition
Definitions of ratios may vary from source to
source e.g. concepts and terminology are not
universally defined.
Result can be distorted by inflation
41
Four main groups of ratios
1.Liquidity ratio
2.Debt ratio
3.Profitability ratio
4.Market ratio
42
1. Liquidity ratios
i. Current ratio
ii. Acid test ratio
iii. Interest coverage ratio
iv. Inventory turnover ratio
v. Account receivable ratio
vi. Account payable ratio
vii. Asset turnover ratio
43
i. Current ratio
Current ratio
Current ratio = CA/ CL
• CA: current assets/CL: current
liabilities
• A firm’s ability to satisfy its short-term
obligations as they come due
• A measure of liquidity calculated by
dividing the firm’s current assets by
its current liabilities
44
i. Current ratio
Determinants of Liquidity Needs
Glance back at the first column of data in
Table 3
Notice that the industry with the higher
current ratio (i.e., most liquidity) is building
materials, an industry notoriously sensitive
to business cycle swings.
The current ratio for that industry is 2.8,
what does it means?
45
HOME DEPOT STORE
46
Table 3
blank
Current
ratio
Average
collection Total
Net
Quick Inventory period
asset Debt profit
ratio turnover
(days) turnover ratio margin
Apple
1.4
1.3
61.6
49.6
0.7
0.6
21.2%
Hewlett-
1.0
0.7
8.8
31.1
1.7
0.7
5.2
Computer
1.5
0.6
21.0
57.0
0.8
0.4
15.6
Home
1.3
0.4
4.3
5.3
1.6
0.5
4.0
Lowe’s
1.3
0.2
3.7
0.0
1.4
0.4
3.7
Building
2.8
0.8
3.7
5.3
1.6
0.3
4.0
Packard
Depot
materials
47
i. Current ratio
Two of the largest competitors in that
industry, Home Depot and Lowe’s,
operate with a current ratio of 1.3, less
than half the industry average.
Does this ratio mean that these firms
have a liquidity problem?
48
ii. Acid test ratio
Acid test ratio:
Current Assets - Inventory
Acid Test ratio =
Current Liability
Inventory has been removed from the
formula of current ratio => acid test
ratio
• Slow-moving => low liquidity
• Pledged to specific creditors
49
ii. Acid test ratio
The Importance of Inventories
Turn again to Table 3.3:
Notice that Apple has a current ratio of 1.4,
almost identical to the current ratios for
Home Depot and Lowe’s, which are 1.3.
For Home Depot and Lowe’s: quick ratio are
much lower than their current ratios
For Apple: current and quick ratios are
nearly equal.
WHY?
50
Table 3
blank
Current
ratio
Quick
ratio
Inventory
turnover
Average
collection
period (days)
Total asset
turnover
Debt
ratio
Net profit
margin
Apple
1.4
1.3
61.6
49.6
0.7
0.6
21.2%
Hewlett-
1.0
0.7
8.8
31.1
1.7
0.7
5.2
Computer
1.5
0.6
21.0
57.0
0.8
0.4
15.6
Home
1.3
0.4
4.3
5.3
1.6
0.5
4.0
Lowe’s
1.3
0.2
3.7
0.0
1.4
0.4
3.7
Building
2.8
0.8
3.7
5.3
1.6
0.3
4.0
Packard
Depot
materials
51
iii. Interest coverage ratio
Income before interest and taxes
Interest coverage=
Coverage of
fixed payment =
Interest payments
Income before interest taxes, taxes,
and leases payment
Interest payments
52
iii. Interest coverage ratio (cont.)
Coverage of
Income before interest & taxes
Interest and =
𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑙𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
Principal
Interest payments +
1−𝑡𝑎𝑥 𝑟𝑎𝑡𝑒
Note:
Principle payment is not tax deductible
Interest payment is tax deductible
53
iii. Inventory turnover ratio
Inventory turnover is the indicator of the
liquidity of inventory.
A measure of a firm’s efficiency with
respect to inventory management
This ratio shows how many times per year
that an average amount of inventory
could be sold out.
Prefer to be high, but is it always good?
54
iii. Inventory turnover ratio (cont.)
• Desirable to be near the industry norm
Too high: too much capital is tight up
in inventory
Too low: inadequate stock on hand
Note:
1.Using average inventory, not ending
inventory
2.Consider seasonality sale
55
iii. Inventory turnover ratio (cont.)
Inventory Turnover In Days =
365
Inventory turnover
 Another indicator of inventory liquidity
This ratio shows how many days it need
for the average amount of inventory to be
sold out.
56
Example
In early 2023, Catherin calculated various
ratios and obtained industry averages.
She was especially interested in inventory
turnover.
Caldwell Manufacturing’s inventory turnover
for 2022 :
blank
Inventory Turnover, 2022
Caldwell Manufacturing
14.8
Industry average
9.7
Is it possible that this turnover ratio
signals any problem for Caldwell
Manufactory?
57
iv. Account receivable turnover ratios
Account Receivable Turnover =
Net Credit Sales
Average Receivable
Indicator of receivable liquidity
A measure of a firm’s efficiency with
respect to receivable management
This ratio shows how many times per year
that an average amount of receivable could
be collected.
Note: We use Average receivable, not
ending receivable on the balance sheet.
58
iv. Account receivable turnover ratios
Receivable Turnover in Days =
365
Receivable Turnover
How many days it takes to collect the
average receivable
Affected by:
Company’s credit policy
Receivable management
59
iv. Account receivable turnover ratios (cont.)
• Note
Customer concentration: too much => risky
Sign of over-recording sale: Receivable
increase too much in comparison with sale
Remove long-term elements
For retailer
Due beyond one year/operating circle
Value of receivable
Return, bad debt reserve, sale policy
Factoring
60
v. Account Payable Turnover
Account Payable Turnover =
COGS
Average Payable
Indicate the need for cash to pay for
short-term debt
61
v. Payable Turnover (cont.)
365
Payable Turnover in Days =
Payable Turnover
How many days it takes to pay the average
account payable for suppliers.
Comparing with industry norm/history
• Lower?
• Higher?
62
v. Payable Turnover (cont.)
Note:
Consult suppliers if possible
Delay recording debt from late
invoices
63
vi. Asset Turnover
Total asset turnover =
Sales
Total Assets
Indicates the efficiency with which
the firm uses its assets to generate
sales
Depending on the industry
Ex: grocery vs computer
64
Matter of Fact
Sell It Fast
It is well known that the grocery
business has a more rapid total asset
turnover than any other industry.
Why?
65
2. Debt Ratios
Focus on evaluating:
Financial Leverage
• The magnification of risk and return
through the use of fixed-cost financing,
such as debt and preferred stock
Degree of Indebtedness
• Ratios that measure the amount of
debt relative to other significant
balance sheet amounts
66
Table 3.8 Financial Statements for
Patty’s Alternatives
67
2. Debt Ratios (Cont.)
i.
ii.
iii.
iv.
Debt Ratio
Debt-to-Equity Ratio
Times Interest Earned Ratio
Fixed Payment Coverage Ratio
68
i. Debt ratio
TOTAL LIABILITY
DEBT RATIO =
TOTAL ASSET
Debt ratio:
Indicate how well creditor is protected in case
of solvency
If the ratio is relatively low:
Easier for company to obtain fund
Low interest rate
69
i. Debt ratio analysis (Cont.)
Analysis pay attention when analyze debt
ratio:
Industry
The quality of asset:
• Intangible asset
• Revaluation of surplus
• Other adjustment
70
ii. Financial leverage
TOTAL LIABILITIES
LEVERAGE RATIO =
TOTAL EQUITIES
• Leverage ratio:
Indicate the capital structure of a company
If the ratio is higher than 1, it means the
company rely more on outside capital
• We also call this the financial leverage ratio
• Total Liabilities = Current Liabilities + Noncurrent Liabilities
71
iii. Time Interest Earned (TIE) (Interest Coverage ratio)
Earning Before Interest and Tax
Interest Coverage =
Total Interest Expense
Interest coverage ratio:
Indicate how well a company can cover its
interest expense
EBIT: Earning Before Interest and Tax
Total Interest Expense: (Interest expense +
Capitalized interest)
• Capitalize interest: Interest which is added to
fixed assets instead of an expense, disclosed
in the footnote (self-construct asset)
72
iv. Fixed Payment Coverage Ratio
Fixed Payment Coverage Ratio =
Earnings Before Interest and Taxes  Lease Payments

 1 
Interest  Lease Payments  (Principal Payments  Prefereed Stock Dividends)  

 1 T 

Measures the firm’s ability to meet all fixedpayment obligations
73
3. Profitability ratios
i.
ii.
iii.
iv.
v.
vi.
Gross profit margin
Operating profit margin
Net profit margin (ROS)
Earnings per share (EPS)
Return on assets (ROA)
Return on equities (ROE)
74
i. Gross profit margin
• Measures the percentage of each
sales dollar remaining after the firm
has paid for its goods
• Gross operating profit: (Sales - Cost
of Goods Sold)
75
i. Gross profit margin: Analysis
Down trend: general reasons
• Cost of material and labour
increase and these increases
have not been passed on to the
customer
• Weakening of local currency
• High competition within the market
• Increase market share by undercutting competitor prices (*)
•…
76
i. Gross profit margin: Analysis (cont.)
Down trend (cont.) technical
reasons
• Product mix is changing =>
effects margin on different product
lines
• Change in cost flow assumptions
• Increase of depreciation allocated
to COGS
77
i. Gross profit margin: Analysis (cont.)
 Uptrend:
• Production efficiency
• Cheaper source of raw material
and labour
• Bulk discount from the supplier (*)
• Other technical sources…
78
ii. Operating profit margin
Operating profit
O𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐩𝐫𝐨𝐟𝐢𝐭 𝐦𝐚𝐫𝐠𝐢𝐧 =
Sales
• Measures the percentage of each
sales dollar remaining after all
costs and expenses other than
interest, taxes, and preferred
stock dividends; the “pure profits”
earned on each sales dollar
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ii. Operating profit margin (cont.)
Notice:
• Try to identify what is core and
what is non-core
income/expenditure
• If the ratio change is out of line
with GM => Overhead
oWatch out expenditure like
house, travel, entertainment
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iii. Net profit margins
𝐄𝐚𝐫𝐧𝐢𝐧𝐠 𝐚𝐯𝐚𝐢𝐥𝐚𝐛𝐥𝐞 𝐟𝐨𝐫 𝐜𝐨𝐦𝐦𝐨𝐧 𝐬𝐭𝐨𝐜𝐤𝐡𝐨𝐥𝐝𝐞𝐫𝐬
NPM=
𝐒𝐚𝐥𝐞𝐬
Measures the percentage of each sales dollar remaining
after all costs and expenses, including interest, taxes, and
preferred stock dividends, have been deducted
Net profit margin is also called as ROS
Note: Difficult to use this ratio to compare
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iii. Net Profit Margin (ROS)
Company B has larger profit but lower ratio
=> Company A generates profit more effectively
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iv. Earnings per share
Earning available for common stockholders
EPS=
Number of shares of common stocks outstanding
• Represents the number of dollars earned by
holding one outstanding common share for one
period
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v. Return on assets (ROA)
𝑬𝒂𝒓𝒏𝒊𝒏𝒈 𝒂𝒗𝒂𝒊𝒍𝒂𝒃𝒍𝒆 𝒇𝒐𝒓 𝒄𝒐𝒎𝒎𝒐𝒏 𝒔𝒕𝒐𝒄𝒌𝒉𝒐𝒍𝒅𝒆𝒓𝒔
𝑹𝑶𝑨 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
• Measures the efficiency of the business
in utilization of its assets
• A falling ratio means non-productive
asset has been acquired
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v. Return on assets (ROA) (Cont.)
So, to improve ROA
•It is better to operate with less assets
(recall assets turnover)
Ex: inventory, receivable, fixed assets
•It is harmful to have non-productive
assets on B/S.
Ex: passed due receivable, excessive
inventory
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Table 3.5 Cross-sectional analysis
blank
Total
asset
turnover
Debt
ratio
Net
profit
margin
1.6
0.5
4.0
6.5
13.7
22.7
Lowe’s
1.4
0.4
3.7
5.4
9.3
20.6
Building
1.6
0.3
4.0
6.5
13.7
26.2
3.2
0.8
1.9
6.0
30.0
13.6
Home
Return on Return on
total
common
assets
equity
Price to
earnings
ratio
Depot
materials
Kroger
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Dissecting ROA
Return to Table 3.5, and examine the ROA figures
for Home Depot and Kroger.
Those two firms have very similar ROAs, with
Home Depot earning 6.5% and Kroger earning
6.0%.
Now, look at their net profit margins. By that
measure, Home Depot is more than twice as
profitable as Kroger (net margin of 4.0% versus
1.9% for Kroger).
If Home Depot’s net profit margin is much
more significant than Kroger’s, why do the two
firms earn similar ROAs?
The answer lies in total asset turnover.
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vi. Returns on Equities (ROE)
𝑬𝒂𝒓𝒏𝒊𝒏𝒈 𝒂𝒗𝒂𝒊𝒍𝒂𝒃𝒍𝒆 𝒇𝒐𝒓 𝒄𝒐𝒎𝒎𝒐𝒏 𝒔𝒕𝒐𝒄𝒌𝒉𝒐𝒍𝒅𝒆𝒓𝒔
𝑹𝑶𝑬 =
𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒊𝒆𝒔
• Measures the post tax return to
shareholders for their investment in
the company.
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Summary - IMPORTANT!
Six steps to perform the analysis for each
group of ratios:
1. Specify right formulars to measure the
requirement items
2. Select right numbers on the financial
statements to put in the formulars
3. Explain the meaning of the ratios
4. Evaluate if the ratios are good or bad
using comparision analysis
5. Explain in detail why the ratios are good
or bad using comparing analysis
6. Propose some ideas to improve the ratios
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PROBLEM SOLVING C17
• Case study
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Reference
• Peter S.Rose and Syvia C.Hudgins, Bank Management & Finacial Services,
Eight Edition, McGraw Hill International Edition, 2014
• Techcombank Annual Report (https://www.fidt.vn/post/techcombank-goc-nhintu-bao-cao-tai-chinh-quy-3-nam-2022;
https://static2.vietstock.vn/data/HOSE/2021/BCTC/VN/NAM/TCB_Baocaotaich
inh_2021_Kiemtoan_Congtyme.pdf)
• ACB Annual Report
(https://static2.vietstock.vn/data/HOSE/2021/BCTN/VN/ACB_Baocaothuongnie
n_2021.pdf)
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