FINANCIAL
INDICATORS
吴亦凡 朱忠明 朱英蕾 盛洁
FPIs
Financial performance
indicators (FPIs) analyse
profitability, liquidity and risk.
Profitability
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How to analyse?
Sales margin
Earnings per share (EPS)
Return on capital employed (ROCE)
The secondary ratios: profit margin
asset turnover
Profit margin × Asset turnover ＝ ROCE
Profitability
How to compare?
• 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
Liquidity
How to analyse?
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The current ratio
The quick ratio
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The accounts receivable payment period
The inventory turnover period
The accounts payable payment period
FPIs
Reporting a
performance evaluation
• 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
ROI
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
Example
Using ROI to
make decisions
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Bought a replacement for the asset that has just been withdrawn.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
RI
Residual income will increase
when investment earning
above the cost of capital are
undertaken and investments
earning below the cost of
capital are eliminated.
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
Residual income is more
flexible, since a different
cost of capital can be applied
to investment with different
risk characteristics
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.
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EVA
Definition
an alternative absolute performance
measure, a specific type of RI.
EVA
72%
50%
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
68%
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:
1. add back accounting depreciation
a. costs should be considered as2.investments
building depreciation
for future and
subtract economic
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
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:
P274
Operating profit
Add back historical depreciation cost
Less economic depreciation
Add back development costs
One year’s amortization of development costs($6,000/2=$3,000)
NOPAT
2. Calculation for net assets:
Replacement costs of net assets ($98,000 + $ 19,000)
Capitalised costs ($6,000 - $3,000)
Economic value of net assets
3. Final calculation of EVA
EVA= 17.30 – 120.00*11%= 4.10
$ ‘000
18.5
8.10
(12.30)
6.00
(3.00)
17.30
117.00
3.00
120.00
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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