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Statement
Analysis
K R Subramanyam
John J Wild
McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
8-2
8
CHAPTER
8-3
Management is
responsible for all
company activities
Planning
Budgeting
Coordinating activities
Evaluating opportunities
Control
8-9
Components of ROI
Return on invested capital is defined as:
Income
Invested Capital
8-10
Components of ROI
Invested Capital Defined
No universal measure
of invested capital
Different measures of
invested capital reflect
users different
perspectives
8-11
Components of ROI
Alternative Measures of Invested Capital
Common Measures:
Stockholders Equity
8-12
Components of ROI
Net Operating Assets
Perspective is that of the company
as a whole
Called return on net operating
assets (RNOA)
RNOA:
measures operating efficiency/
performance
reflects return on net operating
assets (excluding financial
assets/liabilities)
8-13
Components of ROI
Common Equity Capital
Perspective is that of common
equity holders
Captures the effect of leverage
(debt) capital on equity holder
return
Excludes all debt financing and
preferred equity
net income less preferred dividends
average common equity
8-14
Components of ROI
Computing Invested Capital
Components of ROI
Adjustments to Invested Capital and Income Numbers
Components of ROI
Return on Net Operating Assets -- RNOA
NOPAT
(Beginning NOA + Ending NOA) / 2
Where
NOPAT = Operating income x (1- tax rate)
NOA = net operating assets
8-17
Components of ROI
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
Components of ROI
Return on Common Equity -- ROCE
Where
Equity is stockholders equity less preferred
stock
8-19
OA = operating assets
OLLEV = operating liabilities leverage ratio
(operating liabilities / NOA)
8-21
NOPAT
Operating profit margin (OPM) =
Sales
Sales
average net operating assets
8-28
Disaggregating ROCE
8-32