Lecture 3 spring 10a - GrowthandProfitability...

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Growth and Profitability Product Market Strategies Financial Market Strategies Operating Management Investment Management Financing Decisions Payout Decisions Goal: Evaluate effectiveness of the firm’s policies in each of these areas. Return on Equity Financing Activities (Debt Policy) Return on Assets Asset Turnover Profit Margin Operating Activities Investing Activities EBI is referred to as NOPAT in PH. PH book, but is technically a mismatch of the numerator and denominator. Use of ‘Ending TA’ requires less data to form a time series cally, should be ‘sales on account’, but this is hard to measure. et decomposition, while COGS give s a better measure of actual times inventory turns over. Spring 2010 NBA 5060 Lecture 3 – Profitability Analysis 1. Why is profitability analysis important? 2. Profitability Analysis Relative vs. Absolute Analysis Cross-sectional vs. time-series 3. Profitability Ratios Return on Equity (ROA) Return on Assets (ROE) Decomposing these measures Application to SBUX 4. Some Key Takeaways from Profitability Analysis Additional Notes (not covered in class): Supplemental note on the economic relation between accounting ratios and the cost of capital Lecture 3 Page 1 of 16
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For 2/4/10: Read PH 5-18 to 5-32. Compute the liquidity and solvency ratios for SBUX. 1. Why is ratio analysis important? The value of a company depends on its ability to grow and generate profits: The ability to grow and generate profits is a function of the firm’s operating, investing, and financing decisions. Ratio analysis provides a means of evaluating the effectiveness of the firm’s operating, investing, and financing policies: Lecture 3 Page 2 of 16
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Growth Rate ROE Dividend Payout Ratio ROA CSL CEL PM ATO Operating  Management Investment  Management Financing  Decisions Payout  Decisions 2. Profitability Analysis Relative Analysis – compares the financial metrics of a firm relative to the financial metrics of some comparison (i.e. control) group. Absolute level of the numbers does not matter as much as whether they are higher or lower than the comparison group. Two basic types of relative analysis: Cross-sectional approach – compare the firm to industry peers on a number of dimensions. – compares the financial metrics of a firm to absolute levels. Matters less where they rank relative to other firms. e.g. Is operating cash flow positive? Does ROE exceed the cost of capital? Lecture 3 Page 3 of 16
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Lecture 3 spring 10a - GrowthandProfitability...

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