Chapter 08 - Instructors: Please do not post raw PowerPoint...

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Click to edit Master subtitle style Chapter 8 Analyzing Performance and Competitive Position Instructors: Please do not post raw PowerPoint files on public website. Thank you! 11
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Evaluating Historical Performance To analyze a company’s historical performance, we proceed in three steps: Analyze ROIC and Economic Profit Return on invested capital (ROIC) measures the economic performance of a company’s core business. ROIC is independent of financial structure and can be disaggregated into measures examining profitability and capital efficiency. Analyze Revenue Growth Break down revenue growth into its four components: organic revenue growth, currency effects, acquisitions, and accounting changes. Evaluate Credit Health and Financial Structure Assess the company’s liquidity and evaluate its capital structure in order to determine whether the company has the financial resources to conduct business and make short- and long-term investments. Step 1 Step 2 Step 3 Slides 2−10 Slides 11−19 Slides 20−25 22
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Using ROIC to Compare Operating Performance To measure historical operating performance, compute ROIC by comparing NOPLAT to invested capital: percent 1 ROIC measured with goodwill and acquired intangibles. Goodwill and acquired intangibles do not meaningfully affect ROIC for either company. 0 5 10 15 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 Home Depot Lowe's Home Depot and Lowe's: Return on Invested Capital The ROIC at Home Depot outpaced Lowe’s by approximately five percentage points during the early 2000s. This gap disappeared in 2005, when Home Depot began acquiring other companies. 33
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ROIC With or Without Goodwill? Compute ROIC both with and without goodwill and acquired intangibles, because each ratio analyzes different things. To measure aggregate value creation for the company’s shareholders, measure ROIC with goodwill. ROIC excluding goodwill measures the underlying operating performance of the company and its businesses and is used to compare performance against peers and to analyze trends. percent ROIC without goodwill and acquired intangibles ROIC with goodwill and acquired intangibles 13.2 11.1 8.6 2006 2007 2008 18.4 31.7 33.6 2006 2007 2008 CVS Caremark: Return on Invested Capital Note: This presentation sometimes shortens goodwill and acquired intangibles to goodwill. 44
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Understanding Value Creation: Decomposing ROIC in 2008, Home Depot’s ROIC (8.0%) lagged Lowe’s ROIC (8.9%) by approximately one percentage point. But what is driving this drop in performance? Can these losses be recovered? To better understand ROIC, we can decompose the ratio as follows: As the formula demonstrates, a company’s ROIC is driven by its ability to (1) maximize profitability, (2) optimize capital efficiency, or (3) minimize taxes. Profit Margin
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This note was uploaded on 06/06/2011 for the course FINA 4210 taught by Professor Staff during the Spring '08 term at University of Georgia Athens.

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Chapter 08 - Instructors: Please do not post raw PowerPoint...

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