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Seminar 09 - AF 41 07 Fi nancial Sta te men t An alys is...

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1 AF 4107 – Financial Statement Analysis Seminars 8 & 9 – Chapter 5 Financial Analysis II : Financial Ratio Analysis
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2 Financial Ratio Analysis Reading Reading : Chapter 5 (page 83 to 116 of Lundholm Book) Case : Kohl in Chapter 5 of Lundholm Book
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3 Seminars 9: Ratio Analysis 1. Trade off Margins and Turnover Margins Gross margin, EDITDA margin, EBIT margin, Net Operating margin before non-recurring Turnover ratios Net working capital turnover Average days (receivables), average days (inventory), average days (payables) PPE turnover
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4 Seminars 8 & 9: Ratio Analysis 1. Leverage Long term capital structure Debt to Equity, Funds from Operations/CFO to Total Debt Short term liquidity Current ratio, Quick ratio, EBIT interest coverage, EBITDA interest coverage 1. Kohl’s Financial Ratio Analysis
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5 1. Trade Off Margins and Turnover
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6 Analyzing Return on Net Operating Assets--RNOA Disaggregating RNOA NOA Avg. Sales Sales NOI NOA Avg. NOI × = Operating Profit margin: measures operating profitability relative to sales Operating Asset turnover (utilization): measures effectiveness in generating sales from operating assets Return on net operating assets = Operating Profit margin x Operating Asset turnover
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7 Profit Margin and Asset Turnover Profit margin and asset turnover are interdependent Profit margin is a function of sales and operating expenses (selling price x units sold) Asset turnover is also a function of sales (sales/assets) $5 M $10 M $10 M $0.5 M $0.5 M $0.1 M $5 M $5 M $1 M 10% 5% 1% 1 2 10 10% 10% 10% NOI Sales Analysis of Return on Net Operating Assets Return on net operating assets NOA turnover NOI margin NOA
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8 Margin vs. Turnover Trade-Off Difficult in practice to have both high margin Difficult in practice to have both high margin and high turnover and high turnover If a product differentiator product differentiator wants to carry less expensive inventory to improve its asset turnover, customers would probably be unwilling to pay higher margins Outsourcing production Outsourcing production improves turnover, but lowers margin Aging wine Aging wine improves the quality, allows charging a greater margin, but lowers the asset turnover
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9 Factors Influencing the Margin vs. Turnover Trade-Off Higher turnover (and lower margins) results from: Industry with low production technology, uses stores that are designed to sell a high volume sell a high volume following a cost leadership cost leadership strategy following an outsourcing outsourcing strategy, franchising of outlets, leasing of productive capacity ( ( lower lower operating risk with less fixed costs operating risk with less fixed costs ) )
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10 Strategy , Margin and Turnover – cost leaders Cost leaders produce commodity products or services at the lowest cost at the lowest cost (their strategic advantage), maintain a very high conformance quality and price the product or the service price the product or the service at a level that competitors providing the same quality will not be able to match will not be able to match .
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