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Chapter 4

Chapter 4. Measuring Corporate Performance. Topics Covered Value and Value Added Measuring Profitability Measuring Efficiency Analyzing the Return on Assets : The Du Pont System Measuring Leverage Measuring Liquidity Calculating Sustainable Growth Interpreting Financial Ratios

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Chapter 4

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  1. Chapter 4 Measuring Corporate Performance Topics Covered Value and Value Added Measuring Profitability Measuring Efficiency Analyzing the Return on Assets: The Du Pont System Measuring Leverage Measuring Liquidity Calculating Sustainable Growth Interpreting Financial Ratios The Role of Financial Ratios–and a Final Note on Transparency

  2. Value and Value Added • Market Capitalization • Total market value of equity, equal to share price times number of shares outstanding. • Market Value Added • Market capitalization minus book value of equity.

  3. Value and Value Added PepsiCo Balance Sheet (December 31, 2006) $Millions

  4. Value and Value Added Pepsico Income Statement (year end 2006) Net Sales 35,753 COGS 15,762 Selling, G&A expenses 11,357 Depreciation expense 1,406 EBIT 7,228 Net interest expense 239 Taxable Income 6,989 Income Taxes 1,347 Net Income 5,642

  5. Value and Value Added • Market-to-Book Ratio • Ratio of market value of equity to book value of equity.

  6. Measuring Profitability • Economic Value Added (EVA) • Net income minus a charge for the cost of capital employed. Also called residual income. • Residual Income • Net Dollar return after deducting the cost of capital

  7. Measuring Profitability • Economic Value Added (EVA) of PepsiCo Ex: Book Value of Equity = $14,251 million Cost of Equity = 9.5% Net Income = $5,642 million

  8. Measuring Profitability • Accounting measures of company performance, 2006. Companies are ranked by return on equity.

  9. Measuring Profitability • Return on Equity (ROE) • Net income as a percentage of shareholders’ equity • Return on Capital (ROC) • Net income plus Interest as a percentage of long-term capital. • Return on Assets (ROA) • Net income plus interest as a percentage of total assets

  10. Measuring Profitability PepsiCo Profitability Measurements

  11. Measuring Efficiency OR For PepsiCo OR

  12. Measuring Efficiency

  13. The DuPont System • A breakdown of ROE and ROA into component ratios

  14. asset turnover Operating profit margin The DuPont System

  15. Measuring Leverage

  16. Measuring Leverage

  17. Measuring Leverage leverage ratio asset turnover Operating profit margin debt burden

  18. Measuring Liquidity

  19. Liquidity Ratios

  20. Interpreting Financial Ratios • PepsiCo Ratios

  21. Interpreting Financial Ratios • Selected 2006 financial ratios for industry groups in Standard & Poor’s Composite Index

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