财务报表分析英文版答案文档格式.docx

1、s success in using financing to generate profits, and is an excellent measure of operating performance. This chapter describes return on invested capital and its relevance to financial statement analysis. We also explain variations in measurement of return on invested capital and their interpretatio

2、n. We also disaggregate return on invested capital into important components for additional insights into company performance. The role of financial leverage and its importance for returns analysis is examined. This chapter demonstrates each of these analysis techniques using financial statement dat

3、a.OUTLINEImportance of Return on Invested CapitalMeasuring Managerial EffectivenessMeasuring ProfitabilityMeasuring for Planning and ControlComponents of Return on Invested CapitalDefining Invested CapitalAdjustments to Invested Capital and IncomeComputing Return on Invested CapitalAnalyzing Return

4、on Net Operating AssetsDisaggregating Return on Net Operating AssetsRelation between Profit Margin and Asset TurnoverProfit Margin AnalysisAsset Turnover AnalysisAnalyzing Return on Common EquityDisaggregating Return on Common EquityFinancial Leverage and Return on Common EquityAssessing Growth in C

5、ommon EquityANALYSIS OBJECTIVESDescribe the usefulness of return measures in financial statement analysis.Explain return on invested capital and variations in its computation.Analyze return on net operating assets and its relevance in our analysis.Describe disaggregation of return on net operating a

6、ssets and the importance of its components.Describe the relation between profit margin and turnover.Analyze return on common shareholders equity and its role in our analysis.Describe disaggregation of return on common shareholders equity and the relevance of its components.Explain financial leverage

7、 and how to assess a companys success in trading on the equity across financing sources.QUESTIONS1.The return that is achieved in any one period on the invested capital of a company consists of the returns （and losses） realized by its various segments and divisions. In turn, these returns are made u

8、p of the results achieved by individual product lines and projects. A wellmanaged company exercises rigorous control over the returns achieved by each of its profit centers, and it rewards the managers on the basis of such results. Specifically, when evaluating new investments in assets or projects,

9、 management will compute the estimated returns it expects to achieve and use these estimates as a basis for its decision to invest or not.2.Profit generation is the first and foremost purpose of a company. The effectiveness of operating performance determines the ability of the company to survive fi

10、nancially, to attract suppliers of funds, and to reward them adequately. Return on invested capital is the prime measure of company performance. The analyst uses it as an indicator of managerial effectiveness, and/or a measure of the companys ability to earn a satisfactory return on investment.3.If

11、the investment base is defined as comprising net operating assets, then net operating profit （e.g., before interest） after tax （NOPAT） is the relevant income figure to use. The exclusion of interest from income deductions is due to its being regarded as a payment for the use of money from the suppli

12、ers of debt capital （in the same way that dividends are regarded as a payment to suppliers of equity capital）. NOPAT is the appropriate amount to measure against net operating assets as both are considered to be operating.4.First, the motivation for excluding nonproductive assets from invested capit

13、al is based on the idea that management is not responsible for earning a return on non-operating invested capital. Second, the exclusion of intangible assets from the investment base is often due to skepticism regarding their value or their contribution to the earning power of the company. Under GAA

14、P, intangibles are carried at cost. However, if their cost exceeds their future utility, they are written down （or there will be an uncertainty exception regarding their carrying value in the auditors opinion）. The exclusion of intangible assets from the asset base must be based on more substantial

15、evidence than a mere lack of understanding of what these assets represent or an unsupported suspicion regarding their value. This implies that intangible assets should generally not be excluded from invested capital.5. The basic formula for computing the return on investment is net income divided by

16、 total invested capital. Whenever we modify the definition of the investment base by, say, omitting certain items （liabilities, idle assets, intangibles, etc.） we must also adjust the corresponding income figure to make it consistent with the modified asset base.6. The relation of net income to sale

17、s is a measure of operating performance （profit margin）. The relation of sales to total assets is a measure of asset utilization or turnovera means of determining how effectively （in terms of sales generation） the assets are utilized. Both of these measures, profit margin as well as asset utilizatio

18、n, determine the return realized on a given investment base. Sales are an important factor in both of these performance measures.7. Profit margin, although important, is only one aspect of the return on invested capital. The other is asset turnover. Consequently, while Company Bs profit margin is hi

19、gh, its asset turnover may have been sufficiently depressed so as to drag down the overall return on invested capital, leading to the shareholders complaint.8. The asset turnover of Company X is 3. The profit margin of Company Y is 0.5%. Since both companies are in the same industry, it is clear tha

20、t Company X must concentrate on improving its asset turnover. On the other hand, Company Y must concentrate on improving its profit margin. More specific strategies depend on the product and industry.9. The sales to total assets （asset turnover） component of the return on invested capital measure re

21、flects the overall rate of asset utilization. It does not reflect the rate of utilization of individual asset categories that enter into the overall asset turnover. To better evaluate the reasons for the level of asset turnover or the reasons for changes in that level, it is helpful to compute the r

22、ate of individual asset turnovers that make up the overall turnover rate.10. The evaluation of return on invested capital involves many factors. The inclusion/exclusion of extraordinary gains and losses, the use/nonuse of trends, the effect of acquisitions accounted for as poolings and their chance

23、of recurrence, the effect of discontinued operations, and the possibility of averaging net income are just a few of many such factors. Moreover, the analyst must take into account the effects of price-level changes on return calculations. It also is important that the analyst bear in mind that retur

24、n on invested capital is most commonly based on book values from financial statements rather than on market values. And finally, many assets either do not appear in the financial statements or are significantly understated. Examples of such assets are intangibles such as patents, trademarks, researc

25、h and development activities, advertising and training, and intellectual capital.11. The equity growth rate is calculated as follows: Net income Preferred dividends Common dividend payout / Average common equity.This is the growth rate due to the retention of earnings and assumes a constant dividend

26、 payout over time. It indicates the possibilities of earnings growth without resort to external financing. The resulting increase in equity can be expected to earn the rate of return that the company earns on its assets and, thus, further contribute to growth in earnings.12. a. The return on net ope

27、rating assets and the return on common stockholders equity differ by the capital investment base （and its corresponding effects on net income）. RNOA reflects the return on the net operating assets of the company whereas ROCE reflects the perspective of common shareholders.b. ROCE can be disaggregate

28、d into the following components to facilitate analysis:ROCE = RNOA + Leverage x Spread. RNOA measures the return on net operating assets, a measure of operating performance. The second component （Leverage x Spread） measures the effects of financial leverage. ROCE is increased by adding financial lev

29、erage so long as RNOAweighted average cost of capital. That is, if the firm can earn a return on operating assets that is greater than the cost of the capital used to finance the purchase of those assets, then shareholders are better off adding debt to increase operating assets. 13. a. ROCE can be d

30、isaggregated as follows:This shows that “equity turnover” （sales to average common equity） is one of the two components of the return on common shareholders equity. Assuming a stable profit margin, the equity turnover can be used to determine the level and trend of ROCE. Specifically, an increase in

31、 equity turnover will produce an increase in ROCE if the profit margin is stable or declines less than the increase in equity turnover. For example, a common objective of discount stores is to lower prices by lowering profit margins, but to offset this by increasing equity turnover by more than the decrease in profit margin.b. Equity turnover can be rewritten as foll