Lecture Notes Topic 10

MPA702 Topic 10
Financial Analysis
(E-reading, CloudDeakin)
Objectives
Financial analysis: aim and sources of risk
Assessing performance and risk
Common-size financial statements
Financial ratio analysis
Analysis of financial statements
Internal influences
External influences
Sources of information
Limitations
Concluding remarks
Exercises
2
Financial analysis
Aim
To assess performance through analysis of

profitability, growth and risk management
Product market strategies:
Financial market strategies:
Operating decisions.
Investment decisions.
Financing decisions.
Dividend decisions.
Sources of risk ...

3
Financial analysis
Sources of risk
Business risk
Financial risk
Flows from nature of industry.

Affected by:
Flows from use of debt.

Affected by:
Technology
Competition
Regulation
Consumer taste
Interest rates
Type of funding

Common size financial statements - balance sheet: assets
Steam Ltd
Current assets
Power Ltd
Ind. Ave.
$000
$000
112 118
16.1
83 560
6.8
8.9
Accounts receivable
99 725
14.4
283 861
23.2
13.9
Inventories
12 251
1.8
57 367
4.7
2.1
Other current assets
3 604
0.5
27 477
2.2
10.3
Total current assets
227 698
32.8
452 265
36.9
35.2
67 759
9.8
327 406
26.8
18.9
395 056
57.0
369 732
30.2
42.2
2 682
0.4
75 072
6.1
3.7
465 497
67.2
772 210
63.1
64.8
693 195
100.0
1 224 475
100.0
100.0
Cash and liquid assets
Non-current assets
Investments
Land, buildings, plant & equipment
Intangible assets
Total non-current assets
Total assets
5
Common
Size
Balance
Sheet
(Assets)

Common size financial statements - balance sheet: liabilities & equity
Steam Ltd
Current liabilities
Ind.
Ave.
$000
76 855
11.1
234 247
19.1
7.3
Other current liabilities
123 332
17.8
78 093
6.4
19.6
Total current liabilities
200 187
28.9
312 340
25.5
26.9
Long term liabilities
171 055
24.7
573 918
46.9
32.2
Total liabilities
371 242
53.6
886 258
72.4
59.1
Shareholders equity
321 953
46.4
338 217
27.6
40.9
Total liabilities & equity
693 195
100.0
100.0
100.0
Accounts payable
$000
Power Ltd
1 224 475
Common
Size
Balance
Sheet
(Liabilities & Equity)

Common size financial statements - profit and loss
Steam Ltd
Power Ltd
Ind. Ave.
$000
$000
639 731
100.0
1 624 341
100.0
100.0
47 378
7.4
40 538
2.5
3.7
493 765
77.2
1 447 113
89.1
85.8
98 588
15.4
136 690
8.4
10.5
Interest expense
15 628
2.4
51 108
3.1
2.8
Tax
33 676
5.3
20 303
1.3
2.6
Net profit after tax
49 284
7.7
65 279
4.0
5.1
Dividends
16 826
2.6
24 822
1.5
2.0
Sales revenue
Depreciation
Other expenses (incl. COGS)
EBIT
Market data
Market price/share at 30/6/X1
No. of shares (million)
$9.40
$5.14
77.9
195.8
Common
Size
Profit
and
Loss

Financial ratio analysis
Profitability ratios
Measure ability to earn profits steadily over an extended period of time.
Investment ratios
Measure efficiency in management of assets.
Financing ratios
Measure liquidity and solvency in the light of dividend policy.
Market and per share ratios

Measures related to ordinary shares.
8

Financial ratio analysis - Profitability ratios: ROE
Return On Equity (ROE)

Indicates how much a company has earned on funds invested by
ordinary shareholders (i.e., excluding preference shareholders).
Numerator determined by profitability of sales.
Denominator
determined by financing structure (gearing).
ROE = NPAT and Preference Dividends / Ordinary Shareholders Equity

Financial ratio analysis - Profitability ratios: ROE - example
ROE = NPAT and Preference Dividends / Ordinary Shareholders Equity
Steam Ltd ROE = 49 284 / 321 953 = 15.3%

Power Ltd ROE = 65 279 / 338 217 = 19.3%
Notes:
Financing
with more debt reduces Ordinary Shareholders

Equity, thereby causing an increase in ROE. However, this
comes at greater financial risk.
It is common to use average shareholders equity.

10

Financial ratio analysis - Profitability ratios: ROA
Return On Assets (ROA)
Indicates how efficient a company has been in earning profits from its assets,
ignoring financing.
Measures profitability of total investment by shareholders and lenders; that is,

return on total funds employed.
ROA = EBIT / Total Assets
11

Financial ratio analysis - Profitability ratios: ROA - example
ROA = EBIT / Total Assets
Steam Ltd ROA = 98 588 / 693 195 = 14.2%
Power Ltd ROA = 136 690 / 1 224 475 = 11.2%
Notes:
Some analysts prefer NPAT instead of EBIT; however, EBIT

removes effect of interest and tax and focuses on profits from
operating decisions.
It is common to use average total assets.

12

Financial ratio analysis - Profitability ratios: ROA components
ROA components
Asset
Turnover: measures the ability of assets to generate sales.
Gross
Profit Margin: measures profitability of those sales.

ROA = Asset Turnover * Gross Profit Margin
Asset Turnover = Sales / Total Assets
13
Gross Profit Margin = EBIT / Sales

Financial ratio analysis - Profitability ratios: Asset Turnover - example
Asset Turnover = Sales / Total Assets
Steam Ltd Asset Turnover = 639 731 / 693 195 = 0.92 times
Power Ltd Asset Turnover = 1 624 341 / 1 224 475 = 1.33 times
Notes:
Decisions to buy new equipment, build up inventory levels and
grant credit reduce Asset Turnover.
Decision to run 3 (instead of 1 or 2) shifts per day increases
Asset Turnover.
It is common to use average total assets.
14

Financial ratio analysis - Profitability ratios: Gross Profit Margin - example
Gross Profit Margin = EBIT / Sales
Steam Ltd Gross Profit Margin = 98 588 / 639 731 = 15.4%

Power Ltd Gross Profit Margin = 136 690 / 1 624 341 = 8.4%
Notes:
Primarily suits businesses that sell goods as opposed to

services.
Indicator of mark-up.
15

Financial ratio analysis - Profitability ratios: Expense ratios
Expense ratios
Measure
Can
cost structure.
be based on either depreciation expense or interest expense.
Depreciation Expense = Depreciation / Sales
Interest Expense = Interest / Sales
16

Financial ratio analysis - Profitability ratios: Depreciation Expense - example
Depreciation Expense = Depreciation / Sales
Steam Ltd Depreciation Expense = 47 378 / 639 731 = 7.4%

Power Ltd Depreciation Expense = 40 538 / 1 624 341 = 2.5%
Notes:
Although a lower Depreciation Expense is desirable, the

company could be missing out on a tax shield.
Lower depreciation implies lower cash flow.
17

Financial ratio analysis - Profitability ratios: Interest Expense - example
Interest Expense = Interest / Sales
Steam Ltd Interest Expense = 15 628 / 639 731 = 2.4%

Power Ltd Interest Expense = 51 108 / 1 624 341 = 3.1%
Notes:
Although a lower Interest Expense is desirable, the company

could be missing out on a tax shield.
Determination of the optimal interest expense is dependent

on the companys capital structure policy.
18

Financial ratio analysis - Investment ratios: Inventory management ratios
Inventory management ratios
Measure
efficiency in inventory control and level of investment in inventory.

Determined by nature of business: e.g., milk versus cars.
Affected by seasonal factors: e.g., Christmas.
There is a trade-off between high inventory levels and inventory carrying costs.
Build-up of inventory may be indicative of change in consumer taste.
Evaluated using either Inventory Turnover or Inventory Days Outstanding.
Inventory Turnover = COGS / Inventory

Inventory Days Outstanding = (Inventory * 365) / COGS
19

Financial ratio analysis - Investment ratios: Inventory Turnover - example
Inventory Turnover = COGS / Inventory
Steam Ltd Inventory Turnover = 493 765 / 12 251 = 40.3 times

Power Ltd Inventory Turnover = 1 447 113 / 57 367 = 25.2 times
Notes:
Other Expenses used as a proxy for COGS, because

COGS is unavailable.
It is common to use average inventory.
20

Financial ratio analysis - Investment ratios: Inventory Days Outstanding - example
Inventory Days Outstanding = (Inventory * 365) / COGS
Steam Ltd Inventory Days Outstanding = (12 251 * 365) / 493 765 = 9 days
Power Ltd Inventory Days Outstanding = (57 367 * 365) / 1 447 113 = 14 days
Notes:
Other Expenses used as a proxy for COGS, because

COGS is unavailable.
It is common to use average inventory.
21

Financial ratio analysis - Investment ratios: Receivables management ratios
Receivables management ratios

Reflect a companys credit policy particularly its effectiveness in collecting
money from customers.
Affected by economic conditions, industry as well as seasonal factors.
Companies may implement looser credit terms in order to gain market share.
Evaluated using either Receivables Turnover or Average Collection Period.
Receivables Turnover = Credit Sales / Receivables

Average Collection Period = (Receivables * 365) / Credit Sales
22

Financial ratio analysis - Investment ratios: Receivables Turnover - example
Receivables Turnover = Credit Sales / Receivables
Steam Ltd Receivables Turnover = 639 731 / 99 725 = 6.4 times

Power Ltd Receivables Turnover = 1 624 341 / 283 861 = 5.7 times
Notes:
Calculation
assumes that all sales are credit sales.
It is common to use average receivables.
23

Financial ratio analysis - Investment ratios: Average Collection Period - example
Average Collection Period = (Receivables * 365) / Credit Sales
Steam Ltd Average Collection Period = (99 725 * 365) / 639 731 = 56 days
Power Ltd Average Collection Period = (283 861 * 365) / 1 624 341 = 63 days
Notes:
Calculation assumes that all sales are credit sales.
Results should be compared with credit terms: e.g, 30 days.
With the use of EFTPOS, the Average Collection Period for
many retailers in Australia is around 3 days.
It is common to use average receivables.
24

Financial ratio analysis - Investment ratios: Payables Days Outstanding
Payables Days Outstanding
Measures how long it takes a company to pay its creditors.
A rising ratio could be indicative of liquidity problems; however, it could also

imply that a company is trying to match its Average Collection Period.
Payables Days Outstanding = (Payables * 365) / Sales
25

Financial ratio analysis - Investment ratios: Payables Days Outstanding - example
Payables Days Outstanding = (Payables * 365) / Sales
?
?
Steam Ltd Payables Days Outstanding = (76 855 * 365) / 639 731 = 44 days
Power Ltd Payables Days Outstanding = (234 247 * 365) / 1 624 341 = 52 days
Notes:
Calculation uses sales as a proxy for purchases, because

the latter are seldom disclosed.
It is common to use average payables.
26

Financial ratio analysis - Investment ratios: Cash Cycle
Cash Cycle
Measures how long it takes for inventories to be converted to cash.
As demand grows, inventories, receivables and payables grow. If not
carefully managed, liquidity problems may arise.
Cash Cycle = Operating Cycle - Payables Days Outstanding
Operating Cycle = Inventory Days Outstanding + Average Collection Period
27

Financial ratio analysis - Investment ratios: Cash Cycle - example
Operating Cycle = Inventory Days Outstanding + Average Collection Period
Steam Ltd Operating Cycle = 9 + 56 = 65 days

Power Ltd Operating Cycle = 14 + 63 = 77 days
Cash Cycle = Operating Cycle - Payables Days Outstanding
Steam Ltd Cash Cycle = 65 - 44 = 21 days
X Power Ltd Cash Cycle = 77 - 52 = 25 days
Notes:
It
is possible to have a negative Cash Cycle.
28

Financial ratio analysis - Financing ratios: general principles
Financing ratios: general principles

The higher the proportion of assets financed by equity, the lower financial
risk.
However, companies with low levels of debt may be missing out on tax
shields.
At the same time excessive debt is undesirable, particularly when cash flows
are unstable.
Moreover, companies with higher business risk should borrow less.
Furthermore, the nature of the industry affects how much a company can
borrow.
The nature of assets also plays an important role: tangible assets versus
intangible assets.
Financial managers should take all the above into consideration when
determining optimal capital structure (i.e., the level of debt in relation to
equity).
29

Financial ratio analysis - Financing ratios: Debt-to-Assets
Debt-to-Assets
Measures
proportion of assets financed by debt.
Debt-to-Assets = Liabilities / Assets
30

Financial ratio analysis - Financing ratios: Debt-to-Assets - example
Debt-to-Assets = Liabilities / Assets
Steam Ltd Debt-to-Assets = 371 242 / 693 195 = 53.6%

Power Ltd Debt-to-Assets = 886 258 / 1 224 475 = 72.4%
Notes:
A high Debt-to-Assets ratio is indicative of a high level of
financial risk.
It is common to use average liabilities and assets.
31

Financial ratio analysis - Financing ratios: Debt-to-Equity
Debt-to-Equity
Measures
proportion of debt financing relative to equity financing.
Debt-to-Equity = Liabilities / Ordinary Shareholders Equity
32

Financial ratio analysis - Financing ratios: Debt-to-Equity - example
Debt-to-Equity = Liabilities / Ordinary Shareholders Equity
Steam Ltd Debt-to-Equity = 371 242 / 321 953 = 115.3%

Power Ltd Debt-to-Equity = 886 258 / 338 217 = 262%
Notes:
A high Debt-to-Equity ratio is indicative of a high level of
financial risk.
It is common to use average liabilities and shareholders
equity.
33

Financial ratio analysis - Financing ratios: Times Interest Earned
Times Interest Earned

Measures
the number of times interest expense is covered by EBIT.
Times Interest Earned = EBIT / Interest
34

Financial ratio analysis - Financing ratios: Times Interest Earned - example
Times Interest Earned = EBIT / Interest
Steam Ltd Times Interest Earned = 98 588 / 15 628 = 6.3 times

Power Ltd Times Interest Earned = 136 690 / 51 108 = 2.7 times
Notes:
Companies with stable income can accommodate lower Times
Interest Earned ratios.
Banks like to see Times Interest Earned greater than 3 before
they lend to businesses.
Some analysts use cash flow from operations instead of EBIT.
35

Financial ratio analysis - Financing ratios: Current ratio
Current ratio
Measures the proportion of current assets to current liabilities.
Varies according to type of industry: e.g., manufacturers require higher
current ratio than service providers.
Affected by inventory valuation method.
Indicates safety margin for lenders of short-term funds.
Current ratio = Current Assets / Current Liabilities
36

Financial ratio analysis - Financing ratios: Current ratio - example
Current ratio = Current Assets / Current Liabilities
Steam Ltd Current ratio = 227 698 / 200 187 = 1.1 times
Power Ltd Current ratio = 452 265 / 312 340 = 1.4 times
Notes:
If the Current ratio is too high it may be indicative of inefficient
management of working capital.
A Current ratio less than 1 is undesirable.
37

Financial ratio analysis - Financing ratios: Quick ratio
Quick ratio
Measures
immediate ability of current assets to cover current liabilities.

Affected by inventory valuation method.
Affected by nature of inventory: whether liquid or not.
Indicates a more stringent safety margin for lenders of short-term funds.
Quick ratio = (Current Assets - Inventory) / (Current Liabilities - Bank Overdraft)
38

Financial ratio analysis - Financing ratios: Quick ratio - example
Quick ratio = (Current Assets - Inventory) / (Current Liabilities - Bank Overdraft)
Steam Ltd Quick ratio = (227 698 - 12 251) / (200 187 - 0) = 1.1 times
Power Ltd Quick ratio = (452 265 - 57 367) / (312 340 - 0) = 1.3 times
Notes:
Bank overdraft is excluded, because it is regarded as a more

permanent form of debt.
39

Financial ratio analysis - Market and per share ratios: EPS
Earnings Per Share (EPS)

Measures
net profit attributable to a single ordinary share.

Forward-looking in terms of expected capacity of company to pay dividends.
EPS = (NPAT - Dividends paid to Preference Shareholders) / Number of Ordinary Shares
40

Financial ratio analysis - Market and per share ratios: EPS - example
EPS = (NPAT - Dividends paid to Preference Shareholders) / Number of Ordinary Shares
Steam Ltd EPS = (49 284 - 0) / 77 900 = 63.3 cents
Power Ltd EPS = (65 279 - 0) / 195 800 = 33.3 cents
Notes:
Relates to number of shares issued rather than shareholders

equity.
41

Financial ratio analysis - Market and per share ratios: Earnings Yield
Earnings Yield
Measures
return as a percentage of current market share price.
Earnings Yield = EPS / Market Price of a Single Ordinary Share
42

Financial ratio analysis - Market and per share ratios: Earnings Yield - example
Earnings Yield = EPS / Market Price of a Single Ordinary Share
Steam Ltd Earnings Yield = 63.3 / 940 = 6.7%

Power Ltd Earnings Yield = 33.3 / 514 = 6.5%
Notes:
Numbers are from EPS calculations on slide 44
Although Earnings Yield for Steam Ltd. is indicated to be

superior, it is only marginally better than that of Power Ltd. For
all practical purposes, the difference is insignificant.
43

Financial ratio analysis - Market and per share ratios: PE
Price Earnings (PE)

The inverse of Earnings Yield.
Indicates how many times currentearnings investors are willing to pay for a
share.
As such, PE is forward-looking in that it reflects investors perceptions of a
companys earnings potential.
PE = Market Price of a Single Ordinary Share / EPS
44

Financial ratio analysis - Market and per share ratios: PE - example
PE = Market Price of a Single Ordinary Share / EPS
Steam Ltd PE = 940 / 63.3 = 14.9 times
Power Ltd PE = 514 / 33.3 = 15.4 times
Notes:
Numbers are from EPS calculations on slide 44.
For all practical purposes, the difference is insignificant.
A relatively high PE is indicative of expected growth in

earnings.
45

Financial ratio analysis - Market and per share ratios: DPS
Dividends Per Share (DPS)

Measures
the dollar dividend income received from each ordinary share.
DPS = Dividends Paid to Ordinary Shareholders / Number of Ordinary Shares
46

Financial ratio analysis - Market and per share ratios: DPS - example
DPS = Dividends Paid to Ordinary Shareholders / Number of Ordinary Shares
Steam Ltd DPS = 16 826 / 77 900 = 21.6 cents

Power Ltd DPS = 24 822 / 195 800 = 12.7 cents
Notes:
DPS is usually less than EPS, because companies normally

retain a portion of their profits.
47

Financial ratio analysis - Market and per share ratios: Dividend Yield
Dividend Yield
Measures the percentage dividend income received from each ordinary

share, based on its current market price.
Dividend Yield = DPS / Market Price of a Single Ordinary Share
48

Financial ratio analysis - Market and per share ratios: Dividend Yield - example
Dividend Yield = DPS / Market Price of a Single Ordinary Share
Steam Ltd Dividend Yield = 21.6 / 940 = 2.3%
Power Ltd Dividend Yield = 12.7 / 514 = 2.5%
Notes:
Numbers are from DPS calculations on slide 50.
For all practical purposes, the difference is insignificant.
Market price is affected by expectations about future earnings.

49

Financial ratio analysis - Market and per share ratios: Dividend Payout
Dividend Payout
Measures
the percentage of profit paid out as dividends.
Dividend Payout = Amount of Dividends Paid / NPAT
50

Financial ratio analysis - Market and per share ratios: Dividend Payout - example
Dividend Payout = Amount of Dividends Paid / NPAT
Steam Ltd Dividend Payout = 16 826 / 49 284 = 34%
Power Ltd Dividend Payout = 24 822 / 65 279 = 38%
Notes:
Dividend payout is indicative of a companys policy on what

percentage of profit is to be retained.
Companies usually follow a policy of a constant dividend

payout.
51

Financial ratio analysis - Market and per share ratios: Dividend Coverage
Dividend Coverage
Measures how many times earnings (profit) cover dividends on a per-share

basis.
Dividend Coverage = EPS / DPS
52

Financial ratio analysis -
Market and per share ratios: Dividend Coverage - example
Dividend Coverage = EPS / DPS
Steam Ltd Dividend Coverage = 63.3 / 21.6 = 2.9 times

Power Ltd Dividend Coverage = 33.3 / 12.7 = 2.6 times
Notes:
Numbers are from EPS calculations on slide 44.
Numbers are from DPS calculations on slide 50.
53

Financial ratio analysis - Market and per share ratios: NAPS
Net Assets Per Share (NAPS)

Measures
asset backing by shareholders equity on a per-share basis.
NAPS = Ordinary Shareholders Equity / Number of Ordinary Shares
54

Market and per share ratios: NAPS - example
NAPS = Ordinary Shareholders Equity / Number of Ordinary Shares
Steam Ltd NAPS = 321 953 / 77 900 = $4.13

Power Ltd NAPS = 338 217 / 195 800 = $1.73
Notes:
Calculation reflects the book value of assets, rather than their
market value.
A relatively high NAPS may be indicative of a potential
takeover.
55

Summary of profitability ratios
Steam Ltd
Power Ltd
Industry
ROE
15.3%
19.3%
15.9%
ROA
14.2%
11.2%
12.1%
0.92 times
1.33 times
0.87 times
15.4%
8.4%
10.5%
Depreciation Expense
7.4%
2.5%
N.A.
Interest Expense
2.4%
3.1%
N.A.
Profitability ratios
Asset Turnover
Gross Profit Margin
56

Summary of investment ratios
Steam Ltd
Power Ltd
Industry
40.3 times
25.2 times
78 times
9 days
14 days
5 days
6.4 times
5.7 times
8.1 times
Average Collection Period
56 days
63 days
44 days
Payables Days Outstanding
44 days
52 days
N.A.
Cash Cycle
21 days
25 days
N.A.
Investment ratios
Inventory Turnover
Inventory Days Outstanding
Receivables Turnover
57

Summary of financing ratios
Steam Ltd
Power Ltd
Industry
Debt-to-Assets
53.6%
72.4%
59.1%
Debt-to-Equity
115.3%
262%
N.A.
Times Interest Earned
6.3 times
2.7 times
3.7 times
Current ratio
1.1 times
1.4 times
1.3 times
Quick ratio
1.1 times
1.3 times
1.2 times
Financing ratios
58

Summary of market and per share ratios
Steam Ltd
Power Ltd
Industry
63.3 cents
33.3 cents
N.A.
6.7%
6.5%
N.A.
PE
14.9 times
15.4 times
N.A.
DPS
21.6 cents
12.7 cents
N.A.
Dividend Yield
2.3%
2.5%
N.A.
Dividend Payout
34%
38%
N.A.
2.9 times
2.6 times
N.A.
$4.13
$1.73
N.A.
Market and per share ratios

EPS
Earnings Yield
Dividend Coverage
NAPS
59

Internal influences
Developmental stage of company

New companies typically have poor liquidity, particularly when they operate in
growth industries.
Seasonal patterns
Inventories typically build up prior to seasonal demand: e.g., Christmas, Easter,
Summer, Winter, etc.
Nature of product
Some products typically have higher turnover than others: e.g., fast food
compared to hardware.
60

External influences
External influences include:

Competition.
Technological
Economic
61
change.
/ political factors.
Can be either local or global.

Sources of information
Annual reports are the primary source of information.

Other sources include:
Media
releases, particularly the financial press.
The Australian
Analyst
62
Securities Exchange (ASX).
reports.

Limitations
Limitations of financial statement analysis include:
Variation in the classification of financial information: e.g., valuation of

inventory.
Non-disclosure of certain information: e.g., sales by division or by

product line.
Timing of the release of financial information: in some cases this can be

up to 15 months late.
63

Limitations - continued
Limitations - continued:
Lack of benchmarks: e.g., in some cases industry averages are

unavailable.
Overlooks narrative (non-numerical) information: e.g., comments made

in the Notes to the financial statements.
End-of-year numbers may represent extremes: sometimes it is better to

use averages.
64

Concluding remarks
Do
X Do not
Do consider numerous ratios.
Do not rely on only one or two ratios.
Do pay attention to implications and

limitations of ratios.
Do not merely focus on number

crunching.
Do consider ratios from various

categories.
Do not concentrate on ratios that

convey similar information.
65
This is the end of new content for

MPA702 in T1 2015
66

Lecture Notes Topic 10

Transféré par

Informations du document

Description originale:

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Lecture Notes Topic 10

Transféré par

Droits d'auteur :

Formats disponibles

MPA702 Topic 10

Analysis of financial statements

To assess performance through analysis of

Financial market strategies:

Sources of risk ...

Flows from nature of industry.

Flows from use of debt.

Assessing performance and risk

Other current assets

Total current assets

Cash and liquid assets

Assessing performance and risk

Other current liabilities

Total current liabilities

Long term liabilities

Total liabilities & equity

Assessing performance and risk

Net profit after tax

Assessing performance and risk

Market and per share ratios

Assessing performance and risk

Return On Equity (ROE)

determined by financing structure (gearing).

ROE = NPAT and Preference Dividends / Ordinary Shareholders Equity

Assessing performance and risk

ROE = NPAT and Preference Dividends / Ordinary Shareholders Equity

Steam Ltd ROE = 49 284 / 321 953 = 15.3%

with more debt reduces Ordinary Shareholders

It is common to use average shareholders equity.

Assessing performance and risk

Return On Assets (ROA)

Measures profitability of total investment by shareholders and lenders; that is,

ROA = EBIT / Total Assets

Assessing performance and risk

ROA = EBIT / Total Assets

Steam Ltd ROA = 98 588 / 693 195 = 14.2%

Power Ltd ROA = 136 690 / 1 224 475 = 11.2%

Some analysts prefer NPAT instead of EBIT; however, EBIT

It is common to use average total assets.

Assessing performance and risk

Turnover: measures the ability of assets to generate sales.

Profit Margin: measures profitability of those sales.

Asset Turnover = Sales / Total Assets

Gross Profit Margin = EBIT / Sales

Assessing performance and risk

Asset Turnover = Sales / Total Assets

Assessing performance and risk

Gross Profit Margin = EBIT / Sales

Steam Ltd Gross Profit Margin = 98 588 / 639 731 = 15.4%

Primarily suits businesses that sell goods as opposed to

Assessing performance and risk

be based on either depreciation expense or interest expense.

Depreciation Expense = Depreciation / Sales

Interest Expense = Interest / Sales

Assessing performance and risk

Depreciation Expense = Depreciation / Sales

Steam Ltd Depreciation Expense = 47 378 / 639 731 = 7.4%

Although a lower Depreciation Expense is desirable, the

Assessing performance and risk

Interest Expense = Interest / Sales

Steam Ltd Interest Expense = 15 628 / 639 731 = 2.4%

Although a lower Interest Expense is desirable, the company

Determination of the optimal interest expense is dependent