财务报表分析英文课件Chap5

How to increase ROA?-2
The evolution of ROA in the U.S.
the graphs in the next few slides are from Penman and Nissim Review of Accounting Studies, 2019
4. The average ratio for other firms in the same industry (cross-section analysis)
Analysis of Profitability a. Return on assets (ROA): return to the firm
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
COGS-to-Sales ratio Selling, General and administrative (SGA) expense-tosales 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
inventory could be used elsewhere. • A high turnover is preferred to a low one. • Day of inventory in warehouse: 365/Inventory turnover
Fixed asset turnover
receivable turnover
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
• 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.
Return on Common Equity (ROCE)
The value of a firm to equity investors
risk
V = D1/(1+r) + D2/(1+r)2 + D3/(1+r)3 …….
profitability
The value of a firm to creditors
risk
V = I1/(1+r) + I2/(1+r)2 + I3/(1+r)3 + P/(1+r)3
Disaggregating ROA ROA = Profit Margin ratio * Asset turnover ratio
ATO measures the firm’s Ability to generate sales
At a given level of Investment in assets
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).
profitability
Ii: interest revenues in period i P: return of principal
Financial Statement Analysis
1.Understand the relation between the expected return and
Year 4 $ 475
280 53 22 18 16 - 16 389 - 16 = 373 86 + 16 = 102 26 + 4.8 = 30.8 60 + 16 – 4.8 = 71.2
Horrigan Corporation ROA
Average total assets of this company in year 4 (520+650)/2 = 585,
Outline of today’s lecture
1. Value of a firm to investors and creditors 2. Analysis of profitability: ROA 3. Analysis of profitability: ROCE 4. Analysis of profitability: EPS
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)
2. But increased sales increases ATO while decreases PM
3. A dilemma!
4. So one has to increase sales and at the same time hold down costs and expenses, i.e., hold PM at certain level.
Year 4 $ 475
280 53 22 18 16 389 86 26 60
Horrigan Corporation-assuming no debts
Sales Revenue Less expense:
COGS Selling Administrative Depreciation Interest Total Next income before tax Less Income tax expense Next Income
• 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.
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 won’t pay $16 interest expense,
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 firm’s operating profitability.
RNOA: Return on net operating assets Regression to the mean （回归到平均值）
Profit margin
Asset turnover
Revenue growth
Disaggregate PM
PM = (sales – COGS – SGA – depreciation ….)/Sales
Disaggregate ATO
ATO = Sales/average total assets
Average total assets = (average account receivables + average inventory + average fixed assets + average other assets)
PM measures the Firm’s ability to Control cost and Expenses at a given Level of sales Activity.
How to increase ROA?
1. At the current asset base, increase sales?
Horrigan Corporation

Sales Revenue Less expense:
COGS Selling Administrative Depreciation Interest Total Next income before tax Income tax expense Next Income
as a whole
b. Return on common equity (ROCE): return to common shareholders only
c. Earnings per common share
Analysis of Profitability
ROA: return to the firm
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.
ROCE: return to common
Shareholders only
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