On assets roa net income return total assets total 689

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Unformatted text preview: the DuPont Identity ROE = NI / TE Multiply by 1 (TA/TA) and then rearrange ROE = (NI / TE) (TA / TA) ROE = (NI / TA) (TA / TE) = ROA * EM Multiply by 1 (Sales/Sales) again and then Multiply rearrange rearrange ROE = (NI / TA) (TA / TE) (Sales / Sales) ROE = (NI / Sales) (Sales / TA) (TA / TE) ROE = PM * TAT * EM 20 Using the DuPont Identity ROE = PM * TAT * EM Profit margin is a measure of the firm’s Profit operating efficiency – how well it controls costs costs Total asset turnover is a measure of the firm’s Total asset use efficiency – how well does it manage its assets manage Equity multiplier is a measure of the firm’s Equity financial leverage financial 21 Expanded DuPont Analysis – Expanded Aeropostale Data Aeropostale Bal. Sheet (1/28/06) Data Bal. (millions, $U.S.) (millions, Cash = 225.27 Inventory = 91.91 Other CA = 22.16 Fixed Assets = 164.62 2006 Inc. Statement Data 2006 (millions, $U.S.) (millions, Computations TA = 503.96 TAT = 2.39 EM = 1.77 Sales = 1,204.35 COGS = 841.87 SG&A = 227.04 Interest = (3.67) Taxes = 55.15 Computations NI = 83.96 PM = 6.97% ROA = 16.66% ROE = 29.49% 22 Aeropostale Extended DuPont Aeropostale Chart Chart ROE = 29.49% ROA = 16.66% Total Costs = - 1,120.39 EM = 1.77 x PM = 6.97% NI = 83.96 x ÷ + Sales = 1,204.35 Sales = 1,204.35 TAT = 2.39 Sales = 1,204.35 ÷ TA = 503.96 Fixed Assets = 164.62 COGS = - 841.87 SG&A = - 227.04 Cash = 225.27 Interest = - (3.67) Taxes = - 55.15 + Other CA = 22.16 Current Assets = 339.34 Inventory = 91.91 23 Why Evaluate Financial Why Statements? Statements? Internal uses Performance evaluation – compensation and Performance comparison between divisions comparison Planning for the future – guide in estimating future Planning cash flows cash External uses Creditors Suppliers Customers Stockholders 24 Benchmarking Ratios are not very helpful by themselves; they Ratios need to be compared to something need Time-Trend Analysis Used to see how the firm’s performance is changing Used through time through Internal and external uses Peer Group Analysis Compare to similar companies or within industries SIC and NAICS codes 25 Real World Example - I Ratios are figured using financial data from the Ratios 2003 Annual Report for Home Depot 2003 Compare the ratios to the industry ratios in Table Compare 3.12 in the book 3.12 Home Depot’s fiscal year ends Feb. 1 Be sure to note how the ratios are computed in Be the table so you can compute comparable numbers. numbers. Home Depot sales = $64,816 MM 26 Real World Example - II Liquidity ratios Current ratio = 1.40x; Industry = 1.8x Quick ratio = .45x; Industry = .5x Long-term solvency ratio Debt/Equity ratio (Debt / Worth) = .54x; Debt/Equity Industry = 2.2x. Industry Coverage ratio Times Interest Earned = 2282x; Industry = Times 3.2x 3.2x 27 Real World Example - III Asset management ratios: Inventory turnover = 4.9x; Industry = 3.5x Receivables turnover = 59.1x (6 days); Industry = 24.5x Receivables (15 days) (15 Total asset...
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