单击此处编辑母版标题样式,单击此处编辑母版文本样式,第二级,第三级,第四级,第五级,*,Outline of todays lecture,Value of a firm to investors and creditors,Analysis of profitability:ROA,Analysis of profitability:ROCE,Analysis of profitability:EPS,1,The value of a firm to equity investors,V=D,1,/(1+r)+D,2,/(1+r),2,+D,3,/(1+r),3,.,profitability,risk,2,The value of a firm to creditors,V=I,1,/(1+r)+I,2,/(1+r),2,+I,3,/(1+r),3,+P/(1+r),3,I,i,:interest revenues in period i,P:return of principal,profitability,risk,3,Financial Statement Analysis,1.,Understand the relation between the expected return and risk of investment alternatives,and the role of analysis in providing risk and return information.,2.Understand the usefulness of the rate of return on assets(ROA)as a measure of a firms operating profitability.,3.Understand the usefulness of the rate of return on common shareholders equity(ROCE)as a measure of profitability.,4.Understand the strengths and weaknesses of earnings per common share as a measure of profitability.,4,What to compare?,1.The planned ratio for the period,2.The corresponding ratio from a prior period(,time-series analysis,),3.The corresponding ratio for another firm in the same industry(,cross-section analysis,),4.The average ratio for other firms in the same industry(,cross-section analysis,),5,Analysis of Profitability,Return on assets(ROA):return to the firm as a whole,Return on common equity(ROCE):return to common shareholders,only,Earnings per common share,6,Analysis of Profitability,ROA:return to the firm,ROCE:return to,common,Shareholders,only,7,Return on Assets(ROA),ROA presents profitability independent of the source of financing,Does not consider leverage,Measure of how well the firm uses its assets to generate income,As if the firm is financed by equity alone,8,Horrigan Corporation,9,Horrigan Corporation-assuming no debts,10,Horrigan Corporation ROA,Average total assets of this company in year 4,(520+650)/2=585,Then ROA=71.2/585=12.2%,Why add back interest income net of income tax savings in the numerator?,1)If all equity,the firm wont pay$16,interest,expense,which increase net income by$16;,2)at 30%tax rate,government will collect an additional amount of$4.8(16*30%)as tax,then the actual increase of net income is(16 4.8).,11,Disaggregating ROA,ROA=Profit Margin ratio*Asset turnover ratio,ATO measures the firms,Ability to generate sales,At a given level of,Investment in assets,PM measures the,Firms ability to,Control cost and,Expenses at a given,Level of sales,Activity.,12,How to increase ROA?,At the current asset base,increase sales?,But increased sales increases ATO while decreases PM,A dilemma!,So one has to increase sales and at the same time hold down costs and expenses,i.e.,hold PM at certain level.,13,How to increase ROA?-2,14,The evolution of ROA in the U.S.,the graphs in the next few slides are from Penman and Nissim Review of Accounting Studies,2001,15,RNOA:Return on net operating assetsRegression to the mean 回归到平均值,16,Profit margin,17,Asset turnover,18,Revenue growth,19,Disaggregate PM,PM=(sales COGS SGA depreciation.)/Sales,COGS-to-Sales ratio,Selling,General and administrative(SGA)expense-to-sales ratio,Etc.,By observing the time series and cross-section of each expense-to-sales ration,one can identify abnormal ratios and investigate the reasons,in order to control costs and expenses to increase PM,20,Disaggregate ATO,ATO=Sales/average total assets,Average total assets=(average account receivables+average inventory+average fixed assets+average other assets),21,Accounts receivable turnover,Measures how quickly a firm collects cash.,If A.R.turn over twice a year,then they average one half of a year in collection.,Less time is preferred to more.,A high turnover is preferred to a low one.,The days of outstanding for account receivables:365 days/accounts receivable turnover,22,Inventory turnover,Indicates how fast firms sell merchandise.,If inventory turn over twice a year,then they average one half of a year in inventory.,Holding inventory is costly because the funds invested in inventory could be used elsewhere.,A high turnover is preferred to a low one.,Day of inventory in warehouse:365/Inventory turnover,23,Fixed asset turnover,Measures the relation between investment in long-term or fixed assets(such as property,plant,equipment)and sales.,Efficient use of fixed assets would be associated with high sales.,If fixed assets turn over every four years,then each dollar invested in fixed assets is generating a quarter of a dollar in sales per year.,A high turnover is preferred to a low one.,24,25,Return on Common Equity(ROCE),The numerator measures return as net income reduced by any payments to preferred shareholders as these dividends are not available to the common shareholder and have not been deducted from net income.,The denominator is the average amount contributed by common shareholders which includes,Common stock at par,Additional paid in capital,and,Retained earnings.,26,Relation between ROA and ROCE,ROCE is