week2 - week 2 Jean Paul Rabanal Working with financial...

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week 2 Jean Paul Rabanal
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Working with financial statements. .. ● Ratios can be relevant for valuation, performance measurement and prediction. ● Ratios allow comparison across firms and over time: Profitability ratios Short-term liquidity ratios Long-term solvency ratios
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non market value ratios
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non market ratios ● useful when we lack market information ● complement to market information
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Profitability: Return on assets ● The objective is to assess how successful a firm’s operating performance has been or, how successful has been the firm at generating profits? ● Measures a firm’s success in using assets to generate earnings, independent of the financing of the assets.
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Profitability: Return on assets (2) ● ROA = Net income / Total Assets The numerator is net income (from Financial statement) Decomposition of ROA: Insights to a firm’s profitability can be gained by decomposing ROA into components: profit margin and asset turnover.
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Profitability: Return on assets (3) ● ROA = Profit margin X Assets turnover = Net income/ sales X sales /assets Asset turnover => measures the relationship between sales and assets. MU\ JKKOHOJTZR^ OY ZMJ KOXS zYOTL OZY fYYJZY ZU LJTJXfZJ YfRJY"
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Profitability: Return on equity ROE measures the return to shareholders after accounting for the cost of debt. ROE = Net income / Equity
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Profitability: Return on equity (2) ROE = Net income / Assets X Assets/Equity = ROA X Capital structure leverage (LEV) In the textbook, LEV is known as Equity multiplier .
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Du Pont analysis ● Disaggregating ROE (Du Pont identity) ROE = Profit Margin X Assets Turnover X Leverage
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Application Year Yahoo! ROE Profit margin Asset Turnover Leverage 2006 8.2 11.7 0.558 1.26 2007 6.9 9.5 0.570 1.28 2008 3.8 5.9 0.527 1.22 Google 2006 18.1 29.0 0.574 1.08 2007 21.1 25.3 0.655 1.27 2008 18.9 19.4 0.686 1.42
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http://ycharts.com/companies/YHOO/return_on_assets http://ycharts.com/companies/GOOG/return_on_equity Year Yahoo! ROE Profit margin Asset Turnov er Leverag e ROA 2006 8.2 11.7 0.558 1.26 - 2007 6.9 9.5 0.570 1.28 - 2008 3.8 5.9 0.527 1.22 ?
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