FINANCIAL INDICATORS PRESENTED BY GROUP 8 吴亦凡 朱忠明 朱英蕾 盛洁

FPIs Financial performance indicators (FPIs) analyse profitability, liquidity and risk.

Profitability Sales margin Earnings per share (EPS) Return on capital employed (ROCE) The secondary ratios: profit margin asset turnover Profit margin × Asset turnover ＝ ROCE How to analyse?

The change in ratios from one year to next. The ratios being earned by other companies. The choice of basis. eg: similar industries, same shares How to compare ? Profitability

Liquidity The current ratio The quick ratio The accounts receivable payment period The inventory turnover period The accounts payable payment period How to analyse?

FPIs Horizontal analysis A line-by-line comparison Trend analysis The extension of horizontal analysis over a greater period of time. Vertical analysis A percentage of a total account balance Reporting a performance evaluation

Return on investment (ROI) = (Profit/Capital employed)×100% Shows how much profit has been made in relation to the amount of capital invested. Measurement 1.Profit after depreciation as a percentage of net assets employed 2.Profit after depreciation as a percentage of gross assets employed ROI

Using ROI to make decisions Example Book value of non-current assets – $300,000 Net current assets – $40,000 Net profit before tax -- $64,000 The non-current assets – five separate items, each costing $60,000, which are depreciated to zero over 5 years on a straight-line basis. Bought a replacement for the asset that has just been withdrawn. The group’s cost of capital is 15%. Division S has the opportunity of an investment costing $60,000, and yielding an annual profit of $10,000. Total capital employed $220,000 Exiting ROI = (64/220)*100% = 29.1% ROI with new investment = ((64+10)/(220+60))*100% = 26.4%

RI RI = profit – charge for capital employed Notional or imputed interest cost

Residual income will increase when investment earning above the cost of capital are undertaken and investments earning below the cost of capital are eliminated. Residual income is more flexible, since a different cost of capital can be applied to investment with different risk characteristics It dose not facilitate comparisons between investment centres, nor dose it related the size of a centre’s income to the size of the investment Disadvantage VS Advantage RI

Bigger investment centers (asset size) are expected to generate a larger residual income than smaller divisions. This occurs simply because they are larger, and is not necessarily a result of management performance. > <

EVA an alternative absolute performance measure, a specific type of RI. Definition

72% 50% 68% Formula : ( its calculation is similar to RI’s, but please make sure you don’t get them mixed up!) EVA = net operating profit after tax (NOPAT) – capital charge = net operating profit after tax (NOPAT) – weighted average cost of capital(WACC) * net assets EVA

As a specific type of RI, comparisons of calculations between RI and EVA Similarities: interests are both excluded from NOPAT

EVA Difference: 1. for NOPAT: a. costs should be considered as investments building for future and added back to NOPAT, such as goodwill, research, development expenditure and advertising costs. b. adjustments should be made to the depreciation charge c. lease charge are excluded from NOPAT, add in capital employed 2. for net assets: a. valued at replacement b. increased by any costs that have been capitalized due to 1.a above 1. add back accounting depreciation 2. subtract economic depreciation 1. add back accounting depreciation 2. subtract economic depreciation

Operating profit: $18,500 development and launch costs are $6,000 (2 years) Cost depreciation: $8,100 economic depreciation: $12,300 Non-current asset: $83,000 (replacement cost: $98,000) working capital: $19,000 Rate: taxation: ignore WACC:11% per annum 1. Calculation for NOPAT: $ ‘000 Operating profit 18.5 Add back historical depreciation cost 8.10 Less economic depreciation (12.30) Add back development costs 6.00 One year’s amortization of development costs($6,000/2=$3,000) (3.00) NOPAT Calculation for net assets: Replacement costs of net assets ($98,000 + $ 19,000) Capitalised costs ($6,000 - $3,000) 3.00 Economic value of net assets Final calculation of EVA EVA= – *11%= 4.10 P274

EVA Advantages: 1. create real wealth for the shareholders 2. less distorted by the accounting policies selected 3. easily understood 4. advertising and development costs don’t immediately reduce the EVA in the year of expenditure Disadvantages: 1. relatively short-term measure 2. limited use as a guide to the future due to its basis of historical accounts 3. problematic to make adjustments 4. allowance for relative size must be made

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