Ch_08 - Chapter 08 - Return On Invested Capital and...

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Chapter 08 - Return On Invested Capital and Profitability Analysis 8-1 Chapter 8 Return On Invested Capital And Profitability Analysis REVIEW Return on invested capital is important in our analysis of financial statements. Financial statement analysis involves our assessing both risk and return. The prior three chapters focused primarily on risk, whereas this chapter extends our analysis to return. Return on invested capital refers to a company's earnings relative to both the level and source of financing. It is a measure of a company's success in using financing to generate profits, and is an excellent measure of operating performance. This chapter describes return on invested capital and its relevance to financial statement analysis. We also explain variations in measurement of return on invested capital and their interpretation. We also disaggregate return on invested capital into important components for additional insights into company performance. The role of financial leverage and its importance for returns analysis is examined. This chapter demonstrates each of these analysis techniques using financial statement data.
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Chapter 08 - Return On Invested Capital and Profitability Analysis 8-2 OUTLINE Importance of Return on Invested Capital Measuring Managerial Effectiveness Measuring Profitability Measuring for Planning and Control Components of Return on Invested Capital Defining Invested Capital Adjustments to Invested Capital and Income Computing Return on Invested Capital Analyzing Return on Net Operating Assets Disaggregating Return on Net Operating Assets Relation between Profit Margin and Asset Turnover Profit Margin Analysis Asset Turnover Analysis Analyzing Return on Common Equity Disaggregating Return on Common Equity Financial Leverage and Return on Common Equity Assessing Growth in Common Equity
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Chapter 08 - Return On Invested Capital and Profitability Analysis 8-3 ANALYSIS OBJECTIVES Describe the usefulness of return measures in financial statement analysis. Explain return on invested capital and variations in its computation. Analyze return on net operating assets and its relevance in our analysis. Describe disaggregation of return on net operating assets and the importance of its components. Describe the relation between profit margin and turnover. Analyze return on common shareholders' equity and its role in our analysis. Describe disaggregation of return on common shareholders' equity and the relevance of its components. Explain financial leverage and how to assess a company's success in trading on the equity across financing sources.
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Chapter 08 - Return On Invested Capital and Profitability Analysis 8-4 QUESTIONS 1. The return that is achieved in any one period on the invested capital of a company consists of the returns (and losses) realized by its various segments and divisions. In turn, these returns are made up of the results achieved by individual product lines and projects. A well-managed company exercises rigorous control over the returns
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This note was uploaded on 08/22/2011 for the course ECON 7200 taught by Professor Afrey during the Three '10 term at University of Adelaide.

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Ch_08 - Chapter 08 - Return On Invested Capital and...

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