Financial
Statement
Analysis
K R Subramanyam
John J Wild
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
8-2
Profitability Analysis
8
CHAPTER
8-3
BASIC OF PROFITABILITY ANALYSIS
Net income
Net income margin
=
X 100 (%)
Revenue
• What are its implications ?
• To whom is it important ?
8-4
BASIC OF PROFITABILITY ANALYSIS
Gross Profit
Gross margin percent
=
X 100 (%)
Revenue
• What are its implications ?
• To whom is it important ?
8-5
BASIC OF PROFITABILITY ANALYSIS
Revenue
Asset turnover
=
(times)
Average assets
• What are its implications ?
• To whom is it important ?
Revenue
Assets
Profit
8-6
BASIC OF PROFITABILITY ANALYSIS
Net income
Return on assets (ROA) =
X 100
Average assets
• What are its implications ?
• To whom is it important ?
(%)
8-7
BASIC OF PROFITABILITY ANALYSIS
ROA =
Net income
Revenue
Revenue
X
Average assets
ROA = Net income margin X Asset turnover
8-8
Example 1
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.
Chỉ tiêu
Revenue
8
Company A
Company B
$6,000,000
$6,000,000
Total assets
1,200,000
6,000,000
Net Income
125,000
600,000
8-9
Asset turnover
Basic of profitability analysis
Net income margin
8-10
BASIC OF PROFITABILITY ANALYSIS
Net income
Return on equity (ROE)
=
X 100
Average equity
(%)
8-11
BASIC OF PROFITABILITY ANALYSIS
ROE =
Net income
Revenue
X
Revenue
Average assets
X
Average assets
Average equity
ROE = Net income margin X Asset turnover X Asset-to-equity ratio
Profitability
Efficiency
Financial leverage (risk)
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 2009
VCS
1. Net income margin (%) 17.97
DAC
22.50
DTC
15.60
HPS
12.62
2. ROA (%)
10.28
34.00
22.31
7.43
3. ROE (%)
26.51
69.02
90.11
11.96
4. ROI (%)
13.02
35.66
27.06
7.43
5. Total Liabilities-to-Total
assets ratio
0.58
0.50
0.75
0.38
6. Debt-to-equity ratio
1.38
0.50
2.06
0.48
8-15
Return on invested capital (ROI)
• Return on invested capital is defined as:
Income
Invested Capital
• Alternatives of invested capital:
– Net operating assets
– Stockholders’ equity
8-16
Return on net operating assets (RNOA)
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)
Operating and nonoperating activities - Distinction
BALANCE SHEET
Operating assets ..................... OA Financial liabilities .................. FL
Less operating liabilities ........ (OL) Less financial assets ............. (FA)
Net financial obligations......... NFO
Stockholders’ equity................ SE
Net operating assets.............. NOA Net financing ................ NFO + SE
8-18
Disaggregating RNOA
RNOA =
Operating Profit margin x Operating Asset turnover
NOPAT
NOPAT
Sales


Avg. NOA
Sales Avg. NOA
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
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
Equity growth rate = Net income  Preferred dividends  Dividend payout
Average common stockholders’ equity
• 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
Sustainabl e equity growth rate = ROCE  (1Payout rate)
Assumes internal growth
depends on both earnings
retention and return earned on
the earnings retained