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1、Ch叩ter8ReturnonInvestedCapitalandProfitabilityAnalysisREVIEWReturnoninvestedcapitalisimportantinouranalysisoffinancialstatements.Financialstatementanalysisinvolvesourassessingbothriskandreturn.Thepriorthreechaptersfocusedprimarilyonrisk,whereasthischapterextendsouranalysistoreturn.Returnoninvestedca
2、pitalreferstoacompanysearningsrelativetoboththelevelandsourceoffinancing.Itisameasureofacompanyssuccessinusingfinancingtogenerateprofits,andisanexcellentmeasureofoperatingperformance.Thischapterdescribesreturnoninvestedcapitalanditsrelevancetofinancialstatementanalysis.Wealsoexplainvariationsinmeasu
3、rementofreturnoninvestedcapitalandtheirinterpretation.Wealsodisaggregatereturnoninvestedcapitalintoimportantcomponentsforadditionalinsightsintocompanyperformance.Theroleoffinancialleverageanditsimportanceforreturnsanalysisisexamined.Thischapterdemonstrateseachoftheseanalysistechniquesusingfinancials
4、tatementdata.OUTLINE ImportanceofReturnonInvestedCapitalMeasuringManagerialEffectivenessMeasuringProfitabilityMeasuringforPlanningandControl ComponentsofReturnonInvestedCapitalDefiningInvestedCapitalAdjustmentstoInvestedCapitalandIncomeComputingReturnonInvestedCapital AnalyzingReturnonNetOperatingAs
5、setsDisaggregatingReturnonNetOperatingAssetsRelationbetweenProfitMarginandAssetTurnoverProfitMarginAnalysisAssetTurnoverAnalysis AnalyzingReturnonCommonEquityDisaggregatingReturnonCommonEquityFinancialLeverageandReturnonCommonEquityAssessingGrowthinCommonEquityANALYSISOBJECTIVES Describetheusefulnes
6、sofreturnmeasuresinfinancialstatementanalysis. Explainreturnoninvestedcapitalandvariationsinitscomputation. Analyzereturnonnetoperatingassetsanditsrelevanceinouranalysis. Describedisaggregationofreturnonnetoperatingassetsandtheimportanceofitscomponents. Describetherelationbetweenprofitmarginandturno
7、ver. Analyzereturnoncommonshareholdersequityanditsroleinouranalysis. Describedisaggregationofreturnoncommonshareholdersequityandtherelevanceofitscomponents. Explainfinancialleverageandhowtoassessacompanyssuccessintradingontheequityacrossfinancingsources.QUESTIONS1. Thereturnthatisachievedinanyoneper
8、iodontheinvestedcapitalofacompanyconsistsofthereturns(andlosses)realizedbyitsvarioussegmentsanddivisions.Inturn,thesereturnsaremadeupoftheresultsachievedbyindividualproductlinesandprojects.Awell-managedcompanyexercisesrigorouscontroloverthereturnsachievedbyeachofitsprofitcenters,anditrewardsthemanag
9、ersonthebasisofsuchresults.Specifically,whenevaluatingnewinvestmentsinassetsorprojects,managementwillcomputetheestimatedreturnsitexpectstoachieveandusetheseestimatesasabasisforitsdecisiontoinvestornot.2. Profitgenerationisthefirstandforemostpurposeofacompany.Theeffectivenessofoperatingperformancedet
10、erminestheabilityofthecompanytosurvivefinancially,toattractsuppliersoffunds,andtorewardthemadequately.Returnoninvestedcapitalistheprimemeasureofcompanyperformance.Theanalystusesitasanindicatorofmanagerialeffectiveness,and/orameasureofthecompanysabilitytoearnasatisfactoryreturnoninvestment.3. Ifthein
11、vestmentbaseisdefinedascomprisingnetoperatingassets,thennetoperatingprofit(e.g.,beforeinterest)aftertax(NOPAT)istherelevantincomefiguretouse.Theexclusionofinterestfromincomedeductionsisduetoitsbeingregardedasapaymentfortheuseofmoneyfromthesuppliersofdebtcapital(inthesamewaythatdividendsareregardedas
12、apaymenttosuppliersofequitycapital).NOPATistheappropriateamounttomeasureagainstnetoperatingassetsasbothareconsideredtobeoperating.4. First,themotivationforexcludingnonproductiveassetsfrominvestedcapitalisbasedontheideathatmanagementisnotresponsibleforearningareturnonnon-operatinginvestedcapital.Seco
13、nd,theexclusionofintangibleassetsfromtheinvestmentbaseisoftenduetoskepticismregardingtheirvalueortheircontributiontotheearningpowerofthecompany.UnderGAAP,intangiblesarecarriedatcost.However,iftheircostexceedstheirfutureutility,theyarewrittendown(ortherewillbeanuncertaintyexceptionregardingtheircarry
14、ingvalueintheauditorsopinion).Theexclusionofintangibleassetsfromtheassetbasemustbebasedonmoresubstantialevidencethanamerelackofunderstandingofwhattheseassetsrepresentoranunsupportedsuspicionregardingtheirvalue.Thisimpliesthatintangibleassetsshouldgenerallynotbeexcludedfrominvestedcapital.5. Thebasic
15、formulaforcomputingthereturnoninvestmentisnetincomedividedbytotalinvestedcapital.Wheneverwemodifythedefinitionoftheinvestmentbaseby,say,omittingcertainitems(liabilities,idleassets,intangibles,etc.)wemustalsoadjustthecorrespondingincomefiguretomakeitconsistentwiththemodifiedassetbase.6. Therelationof
16、netincometosalesisameasureofoperatingperformance(profitmargin).Therelationofsalestototalassetsisameasureofassetutilizationorturnover-ameansofdetermininghoweffectively(intermsofsalesgeneration)theassetsareutilized.Bothofthesemeasures,profitmarginaswellasassetutilization,determinethereturnrealizedonagiveninvestmentbase.Salesareanimportantfactorinbothoftheseperformancemeasures.7. Profitmargin,althoughimportant,isonlyoneaspecto
