SCM 605: Supply
Chain Management
Reporting System
Chapter 3: Financial Analysis
Week 2 Learning Objectives
LO 2-1 Distinguish different supply chain finance solutions.
LO 2-2 Describe the advantages and disadvantages of supply
chain finance types in business operations.
LO 2-3 Develop or assess supply chain finance strategies using
synergy and top-down principles.
LO 2-4 Identify and explain key components of financial
statements.
LO 2-5 Describe the key components of financial statements.
Introduction
• As Goldratt & Cox (2016) elucidated, the primary objective of a
firm is to generate profits. Consequently, financial flow is of
paramount importance to any business.
 For instance, when J.C. Penney, a 118-year-old
department store, sought Chapter 11 protection on May
15, 2020, amidst the COVID-19 pandemic, it lacked the
necessary funds to clear its looming debts.
 Similarly, when Sears Holdings declared Chapter 11
bankruptcy on October 15, 2018, its assets amounted to
$6.9 billion, whereas its liabilities soared at $11.3 billion.
• It's intriguing to note that despite its significance, financial
flow and cash flow topics often find themselves sidelined in
SCM literature. Many firms, when relying on a slew of KPIs,
inadvertently let their internal objectives operate in silos,
preventing alignment with the overarching aim of profit
maximization.
Financial Statements
• In the U.S., all public companies are required to adhere to
the Generally Accepted Accounting Principles (GAAP)
when issuing their financial statements.
• In China, firms use the Chinese Accounting Standards
(CAS).
• European listed companies follow the International
Financial Reporting Standards (IFRS).
• The core principles across these standards are largely
consistent.
• We will use financial statements from the Boeing
Company as a reference to demonstrate the components
of the balance sheet, income statement, and cash flow
statement.
Financial Statements
Balance Sheet
• A balance sheet encompasses three primary categories:
Assets, Liabilities, and Equity.
Relationship of Assets, Liabilities, and Equity
Inventories
Other current assets
Total current assets
Customer financing, net
Property, plant and equipment, net
Goodwill
Acquired intangible assets, net
Deferred income taxes
Investments
Other assets, net of accumulated amortization of $580
and $503
Total assets
Liabilities and equity
Accounts payable
Accrued liabilities
Advances and progress billings
Short-term debt and current portion of long-term debt
Total current liabilities
Deferred income taxes
Accrued retiree health care
Accrued pension plan liability, net
Other long-term liabilities
Long-term debt
Shareholders’ equity:
Common stock, par value $5.00 – 1,200,000,000
shares authorized;
1,012,261,159 shares issued
Additional paid-in capital
Treasury stock, at cost
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
Financial Statements
Balance Sheet
76,622
3,106
102,229
2,136
12,502
8,060
3,338
683
1,092
62,567
2,335
87,830
2,418
12,645
7,840
3,429
284
1,087
3,585of
1,826
The Boeing Company and Subsidiaries 2019 Consolidated Statements
Financial Position (Income Statement, Source: Boeing.com)$133,625 $117,359
(Dollars in millions, except per share data)
December 31,
Assets
Cash and cash equivalents
Short-term and other investments
Accounts receivable, net
Unbilled receivables, net
Current portion of customer financing, net
Inventories
Other current assets
Total current assets
Customer financing, net
Property, plant and equipment, net
Goodwill
Acquired intangible assets, net
Deferred income taxes
Investments
Other assets, net of accumulated amortization of $580
and $503
Total assets
Liabilities and equity
Accounts payable
Accrued liabilities
Advances and progress billings
Short-term debt and current portion of long-term debt
Total current liabilities
Deferred income taxes
Accrued retiree health care
Accrued pension plan liability, net
2019
2018
$9,485
545
3,266
9,043
162
76,622
3,106
102,229
2,136
12,502
8,060
3,338
683
1,092
$7,637
927
3,879
10,025
460
62,567
2,335
87,830
2,418
12,645
7,840
3,429
284
1,087
3,585
1,826
$133,625
$117,359
$15,553
22,868
51,551
7,340
97,312
413
4,540
16,276
$12,916
14,808
50,676
3,190
81,590
1,736
4,584
15,323
$15,553
22,868
51,551
7,340
97,312
413
4,540
16,276
3,422
19,962
$12,916
14,808
50,676
3,190
81,590
1,736
4,584
15,323
3,059
10,657
5,061
6,745
-54,914
50,644
-16,153
-8,617
317
-8,300
$133,625
5,061
6,768
-52,348
55,941
-15,083
339
71
410
$117,359
Financial Statements
Income Statement
• The income statement
provides an overview of a
firm’s revenue, costs,
expenses, and earnings
over a specific period.
• As one of the three primary
financial statements, it
offers valuable insights into
a firm’s operational
efficiency by examining its
revenue and costs, thus
reflecting the effectiveness
of its management.
The Boeing Company and Subsidiaries 2019
Consolidated Statements of Operations (Income
Statement, Source: Boeing.com)
(Dollars in millions, except per share data)
Years ended December 31,
Sales of products
Sales of services
Total revenues
Cost of products
Cost of services
Boeing Capital interest expense
Total costs and expenses
(Loss)/income from operating investments, net
General and administrative expense
Research and development expense, net
Gain on dispositions, net
(Loss)/earnings from operations
Other income, net
Interest and debt expense
(Loss)/earnings before income taxes
Income tax benefit/(expense)
Net (loss)/earnings
Basic (loss)/earnings per share
Diluted (loss)/earnings per share
2019
$66,094
10,465
76,559
-62,877
-9,154
-62
-72,093
4,466
-4
-3,909
-3,219
691
-1,975
438
-722
-2,259
1,623
($636)
($1.12)
($1.12)
2018
$90,229
10,898
101,127
-72,922
-8,499
-69
-81,490
19,637
111
-4,567
-3,269
75
11,987
92
-475
11,604
-1,144
$10,460
$18.05
$17.85
Financial Statements
Cash Flow Statement
• The cash flow statement chronicles the movement of a firm's
cash and cash equivalents (CCE). It categorizes the CCE into
three main activities: operating, investing, and financing.
• This statement illustrates how a firm manages its cash
position, generates funds to cover its operating expenses, and
meets its debt obligations.
• Consequently, the cash flow statement can provide insights
into a firm's financial stability (considering liquidity,
solvency, and financial flexibility) and inform adjustments to
its operations, investment, and financing strategies.
Other charges and credits, net
Changes in assets and liabilities –
Accounts receivable
Unbilled receivables
Advances and progress billings
Inventories
Other current assets
Accounts payable
Accrued liabilities
Income taxes receivable, payable and deferred
Other long-term liabilities
Pension and other postretirement plans
Customer financing, net
Other
Net cash (used)/provided by operating activities
Cash flows – investing activities:
Property, plant and equipment additions
Property, plant and equipment reductions
Acquisitions, net of cash acquired
Proceeds from dispositions
Contributions to investments
Proceeds from investments
Purchase of distribution rights
Other
Net cash used by investing activities
Cash flows – financing activities:
New borrowings
Debt repayments
Contributions from noncontrolling interests
Stock options exercised
Employee taxes on certain share-based payment arrangements
Common shares repurchased
Dividends paid
Other
Net cash provided/(used) by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase/(decrease) in cash & cash equivalents, including
restricted
Financial Statements
Cash Flow Statement
334
247
603
982
737
-12,391
-682
1,600
7,781
-2,476
-621
-777
419
196
-2,446
-795
-1,826
2,636
568
98
2
1,117
-180
87
-153
120
610
15,322
-1,834
334
-455
464
-1,658
1,759
-127
-13
-1,530
-1,722
120
-3,230
25,389
-12,171
7
58
-248
-2,651
-4,630
-15
5,739
-5
8,548
-7,183
35
81
-257
-9,000
-3,946
-11,722
-53
1,758
-1,074
The Boeing Company and Subsidiaries Consolidated Statements of Cash
Flows (Cash Statement, Source: Boeing.com)
(Dollars in millions)
Years ended December 31,
Cash flows – operating activities:
Net (loss)/earnings
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Non-cash items –
Share-based plans expense
Depreciation and amortization
Investment/asset impairment charges, net
Customer financing valuation adjustments
Gain on dispositions, net
Other charges and credits, net
Changes in assets and liabilities –
Accounts receivable
Unbilled receivables
Advances and progress billings
Inventories
Other current assets
Accounts payable
Accrued liabilities
Income taxes receivable, payable and deferred
Other long-term liabilities
Pension and other postretirement plans
Customer financing, net
Other
Net cash (used)/provided by operating activities
Cash flows – investing activities:
Property, plant and equipment additions
Property, plant and equipment reductions
Acquisitions, net of cash acquired
Proceeds from dispositions
Contributions to investments
2019
2018
($636)
$10,460
212
2,271
443
250
-691
334
202
2,114
93
-3
-75
247
603
982
737
-12,391
-682
1,600
7,781
-2,476
-621
-777
419
196
-2,446
-795
-1,826
2,636
568
98
2
1,117
-180
87
-153
120
610
15,322
-1,834
334
-455
464
-1,658
-1,722
120
-3,230
-2,607
-2,607
2,898
-69
-11
-4,621
Profit Margin
Profit and Asset Rations
• Profit margin is a fundamental indicator of profitability.
It can be broadly classified into two types: gross profit
margin and net profit margin.
• While the Gross Profit Margin calculates the difference
between revenues and the costs of goods sold, the Net
Profit Margin determines the net earnings (as seen in the
Income Statement) after accounting for taxes,
administrative expenses, and all other deductions.
• Both gross and net profit margins serve as pivotal tools in
evaluating a company's fiscal health. The profit margin is
quintessential for operations as it not only mirrors the
company's pricing strategy but also its competence in
managing operating expenses.
Profit and Asset Rations
Return on Equity (ROE)
• For investors and executives, the Return on Equity
(ROE) serves as a pivotal metric that gauges a firm’s
profitability in relation to its equity. Essentially, ROE
evaluates a company's efficiency in leveraging its equity
to generate profits.
• ROE can also be interpreted as a return on assets minus
liabilities. This perspective is derived from the fact that
equity is the difference between total assets and total
liabilities.
• An ROE value ranging between 15-20% is typically
deemed commendable.
Profit and Asset Rations
Return on Assets (ROA) and Return on Net Assets
• Return on Assets (ROA) and Return on Net Assets
(RONA) serve as indicators to determine the efficiency
of a company in leveraging its assets.
• A substantial ROA or RONA ratio is indicative of
superior financial performance, reflecting the
company's capability to generate significant returns
from its assets.
Profit and Asset Rations
Return on Invested Capital (ROIC)
• Return on Invested Capital (ROIC) is a tool firms utilize to evaluate their
growth potential.
 NOPAT stands for Net Operating Profit After Tax, calculated as the net
earnings/profit plus interest or EBIT minus tax.
 NOPBT, or Net Operating Profit Before Tax, aligns with the earnings
from operations or operating income (before taxes) as listed in the
Income Statement.
 Invested Capital (IC), also known as Cost of Investment or Cost of
Capital, represents the capital utilized to run a business.
• However, there isn't a standardized method for computing invested
capital. Generally, an optimal ROIC should be at least two percent
above the cost of capital.
Profit and Asset Rations
Return on Invested Capital (ROIC)
Average total assets(1), (2)
2020
$235,277
2019
$211,909
+ Average accumulated depreciation and amortization(1), (2)
90,351
85,107
- Average accounts payable (1)
47,017
46,576
- Average accrued liabilities(1)
+ Rent x 8
Average invested capital
22,228
N/A
$256,383
22,141
24,032
$252,331
In millions, Fiscal Years Ended January 31
• For Walmart in 2020:
• This value suggests Walmart's commendable performance in
operations, investments, and financing in that year.
Profit and Asset Rations
Economic Value Added
• The relationship between operations and finance is vital for
measuring the performance of a firm’s supply chain
management. One method to assess this is through Economic
Value Added (EVA), which evaluates the firm in terms of ROIC
and the cost of capital.
 Weighted Average Cost of Capital (WACC) represents the weighted
average cost of capital.
• A firm creates value when its ROIC exceeds its cost of capital.
• A positive EVA is essential. Without it, a specific investment or
the company as a whole is not considered profitable after
accounting for its capital costs.
Profit and Asset Rations
Asset Turnover Ratio
• The Asset Turnover Ratio indicates how efficiently a company can
utilize its assets to produce revenue.
• It's evident that Boeing’s sales saw a significant downturn in 2019
while its inventory increased, suggesting inefficiency in asset
utilization. The asset turnover rate, however, fluctuates across
industries.
• Airbus surpassed Boeing in performance for 2019, though both
substantially trailed behind Walmart.
Profit and Asset Rations
The Table recapitulates the financial concepts discussed in this
Definition
Boeing
Airbus
Walmart
segment.
Gross Profit
Revenue - Cost of Goods Sold (COGS)
$4,466
€ 11,766
$129,104
(in million, Year 2019 )
Operating Income
Earning from operations (before
interest and taxes)
($1,975)
€ 1,036
$20,568
EBIT
Earning Before Interest and Taxes
($1,913)
€ 1,339
$20,568
$358
€ 4,266
$31,555
($1,241)
€ 756
$15,201
($636)
(€ 1,362)
$14,881
$76,559
€ 70,478
$523,964
($3,945)
€ 5,990
$80,593
Cost of investment or cost of capital
$35,543
€ 17,392
$256,383
Total assets - current liabilities
$1,404
$133,625
€ 52,035
€ 114,409
$158,705
$236,495
5.83%
16.69%
-0.83%
-1.93%
16.12%
-22.74%
-136.25%
2.57%
-0.48%
-1.19%
-3.49%
4.35%
8.0%
11.6%
($4,084.44) € (1,261.17)
0.57
0.62
24.64%
2.84%
18.46%
12.96%
6.29%
5.93%
4.2%
$4,432.91
2.22
EBITDA
NOPAT
Net Profit
Revenue
Average Equity
Average Invested
Capital
Capital Employed
Total Assets
Gross Profit Margin
Profit Margin
ROE
ROCE
ROA
ROIC
WACC
EVA
Asset Turnover Ratio
Earning Before Interest, Taxes,
Depreciation, and Amortization
Net Operating Profit After Taxes
Net earning/income after interest and
taxes
Sales of products and services
Average equity of this year and the
past year
Gross Profit/Revenue
Net Profit/Revenue
Net Profit/(Average) Equity
EBIT/Capital Employed
Net Profit/Total Assets
NOPAT/Invested Capital
Weighted Average Cost of Capital
(ROIC-WACC) X Invested Capital
Total Revenue/Average Assets
The DuPont Analysis
The ROE DuPont Model
To gain a deeper insight into the various drivers of ROE, DuPont
explosives salesman Donaldson Brown devised the following
formula for an internal efficiency report in 1912:
The net profit margin gauges the firm’s operating efficiency, while
asset turnover reflects the efficiency with which assets are utilized.
The equity multiplier, defined as assets divided by equity, is also
known as financial leverage. In this context, the traditional ROE
equation can be broken down as:
The DuPont Analysis
The ROE DuPont Model
• This equation can be visually represented in the following ROE
Tree:
Net Profit
÷
Operating
Efficiency
×
Sales
(Revenue)
÷
Asset
Turnover
Asset
Efficiency
Return on
Equity
×
Average
Assets
÷
Average
Equity
Profit
Margin
Equity
Multiplier
Financial
Leverage
• The decomposition of the ROE equation provides insights into the
core performance factors of a firm.
The DuPont Analysis
The ROE DuPont Model
• As illustrated in the aforementioned ROE tree, the final ROE
value can be derived from the four components on the left:
net profit, sales, average assets, and average equity.
• Considering the additional financial terms in financial
statements, we can further break down the equation as:
The DuPont Analysis
The ROE DuPont Model
This expanded ROE model is commonly referred to as the DuPont
Analysis or DuPont Model. This can be further depicted as the
DuPont Analysis
Net Profit
Pretax
Income
EBIT
Revenue
÷
Tax
Burden
÷
Interest
Burden
÷
×
Profit
Margin
×
×
Return On
Sales (ROS)
Revenue
Average
Assets
Average
Equity
÷
÷
Asset
Turnover
×
Equity
Multiplier
Return on
Equity
The DuPont Analysis
The ROE DuPont Model
• The DuPont Analysis's breakdown of ROE allows us to pinpoint a
company's strengths and weaknesses across essential financial
performance metrics.
• The impact of supply chain finance can be discerned in all these
broken-down factors of ROE. Depending on a firm's role within a
specific supply chain finance event, the impact might vary, but
typically it's positive, owing to the Pareto effect:
The profit margins can benefit from increased supply chain
transactions.
The asset turnover ratio can see considerable improvement with a
higher revenue from more transactions within a specified period.
The equity multiplier might decrease since supply chain finance can
potentially replace some direct bank financing or at least mitigate a
firm's loan borrowing burden, reducing financial risks.
The DuPont Analysis
The ROA DuPont Model
• Using the same logic as in the DuPont analysis for ROE, we can
execute a similar decomposition analysis for other financial ratios,
such as ROA and ROIC. For private companies that lack equity
information, ROA can be broken down as follows:
• Compared to the ROE decomposition, it's evident that ROA is not
influenced by the equity multiplier.
The DuPont Analysis
The ROIC DuPont Model
• While ROE focuses on the return on stock investment,
ROIC emphasizes the return on capital investment.
Following the ROIC definition, we can further
decompose the equation into two primary
components:
NOPAT/Revenue, indicates the after-tax profit margin per
item sold. This represents operational efficiency (cost-saving)
and the appeal of the products (brand recognition) the
company offers to the market (optimal pricing).
Revenue/Invested Capital, gauges the capital turnover and is
closely associated with supply chain efficiency.
The DuPont Analysis
The ROIC DuPont Model
Based on Walmart's 2019 data, the corresponding ROIC tree can be
illustrated:
Earning from
Operations
-
Interest and
Debt Expense
NOPAT
$15,201M
÷
Taxes
NOPAT/Revenue
2.90%
Revenue
×
$523,964M
Sales
Net Working
Capital
Invested
Capital
$256,383M
Assets in
Operations
÷
Revenue/
Invested Capital
2.04
ROIC
5.93%
The DuPont Analysis
The ROIC DuPont Model
• Indeed, we can further decompose the ROIC equation by
considering the effective cash tax rate:
• NOPAT stands for Net Operating Profit After Taxes, and NOPBT
represents Net Operating Profit Before Taxes. Hence,
The DuPont Analysis
The ROIC DuPont Model
• Because NOPAT equals revenue minus costs and tax, and since
revenue can be expressed as the flow rate times variable costs,
ROIC can also be broken down as:
• Intuitively, lower variable costs and tax rates contribute to a
higher ROIC, explaining the common practices of outsourcing and
seeking tax havens.
The DuPont Analysis
The ROIC DuPont Model
• From another angle, ROIC can elucidate the operational efficiency
of an individual investment. For this, we introduce an alternate
method to break down invested capital:
• The Net Working Capital can be computed by adding account
receivables and inventory and then subtracting account payables
associated with this specific investment. Typically, an individual
investment contributes to the depreciation of fixed assets, which
can be estimated based on this investment's proportion to all
investments. The assets required for operations could also be
subject to judgment.
The DuPont Analysis
The ROIC DuPont Model
• Examples of ROIC DuPont Analysis
Firm A
Business 1
Business 2
Business 3
NOPAT
Account Receivables
Inventory
Account Payables
Net Working Capital
Assets in operations
Invested Capital
688
2000
2565
3213
1352
1321
2673
688
3000
2565
3213
2352
1321
3673
688
4000
2565
2356
4209
1321
5530
ROIC
26%
19%
12%
Chain Aggregated Indexes
To gauge the total impact of supply chain finance across all
these entities, we might employ the following chain
aggregated indexes (CAIs).
Chain Performance Indexes
• A performance index quantifies the overall efficacy of a supply
chain. Consider ROIC as an example.
• Acknowledging the relative dominance of each firm in the supply
chain, and under the assumption that no firm would engage in a
deal with a negative ROIC, the optimal strategy for enhancing the
overall performance of the supply chain in a given transaction is to
maximize the following weighted geometric mean:
Chain Aggregated Indexes
Chain Performance Indexes
• Similar analyses can be applied to ROE, ROA, RONA, and EVA at
the firm level, leading to the following chain aggregated indexes:
Chain Aggregated Indexes
Chain Performance Indexes
• A higher chain aggregated index is more likely to lead to the Pareto
effect and the Halo effect in supply chain finance, making the
relationship among the involved parties in the supply chain more
sustainable.
• While the aforementioned chain aggregated indexes capture the
combined growth rate of all firms in a supply chain transaction, an
extreme value can significantly skew the final result. To mitigate the
influence of such outliers, we could employ the weighted arithmetic
mean. For instance:
Chain Aggregated Indexes
Chain Equality Indexes
• Essentially, the core tenet of Nash bargaining allows a more
dominant firm to reap greater benefits; meaning, a higher 𝜃𝑖
results in more favorable outcomes for firm 𝑖. If “fairness” means
that all stakeholders have identical financial ratios or “equality,”
then 𝜃𝑖 should be universally set to 1.
• To gauge the equity of all firms within a supply chain transaction,
consider the following index:
Chain Aggregated Indexes
Chain Equality Indexes
• The subsequent table illustrates how these indexes are computed.