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Assessing Company Performance

2. Assessing company performance. . How we will assess company performance in this course Common pitfalls

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Assessing Company Performance

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    1. 1 Assessing Company Performance Business Strategy Term 3, 2003 Paul Kerin

    2. 2 Assessing company performance

    3. 3 Typical profit & loss statement Total Revenue [i.e. sales] (Operating Expenses) EBIT [also referred to as operating profit] (Interest Expense) Profit Before Tax [also referred to as PBT] (Tax Expense) Profit After Tax [also referred to as PAT or net proft]

    4. 4 Typical balance sheet Current Assets Cash Accounts Receivable Inventory Etc Fixed Assets Property, Plant & Equipment Goodwill Etc Total Assets Current Liabilities Accounts Payable Accrued Liabilities (eg wages pay) Short-term Debt Etc Long-term Liabilities Long-term Debt Provisions (eg, deferred taxes) Etc Equity Paid-in capital Retained earnings Etc Total Liabilities & Equity

    5. 5 Alternative Measures Preferred measure: Return on Invested Capital (ROIC=RONA=ROFE) EBIT / (LTL+E) or EBIT/(FA+NWC) Other measures: Return on Assets (ROA or ROTA) EBIT / Total Assets Return on Equity (ROE or ROSF) PAT / Equity EBIT Margin (operating profit margin) EBIT / Total Revenue

    6. 6 Why ROIC? Better than ROA: IC = TA CL CL are working, non-interest-bearing liabilities which help reduce invested capital Makes a difference on average, CL = 27% of TA (ASX 2000) Supermarket example Better than ROE In understanding inherent industry attractiveness and in comparing the performance of different companies separates out operating performance from financing decisions Leveraging up can raise ROE for any given ROIC Better than EBIT margin: ROIC = EBIT margin / net asset turnover Net asset turnover varies enormously between and within industries Supermarket example

    7. 7 Ultimately these measures are all related ...

    8. 8 Gearing magnifies profits (and losses) and changes the ROE (but also risk) for any given ROIC

    9. 9 EBIT margins and asset intensity varies dramatically between industries

    10. 10 Assessing what is an acceptable (or excellent) ROIC depends on a number of factors Which industry? (eg, consumer goods vs steel or airlines) Which country? (eg, Japan) Which time period? (eg, 1980s vs 1930s, one year vs multi-year, inflation) Etc

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