财务分析与证券定价(英文)chapter11

财务分析与证券定价(英文)chapter11 财务分析与证券定价(英文)chapter11 Chapter 11 The Analysis of Profitability Links What you will learn from this chapter How return on common equity (ROCE) is broken down into its drivers How financial leverage affects shareholder profitability How operating liability leverage affects the profitability of operations The difference between Return on Net Operating Assets (RNOA) and Return on Assets (ROA) How profit margins and asset turnovers drive RNOA How borrowing costs are analyzed How profitability analysis is used to ask “what if” questions in sensitivity analysis The Focus: Accounting-Based Valuation The task is to determine premiums over book value (or equivalently, the P/B ratio) What will future ROCE 8>be? What will be the growth in the future? Point of departure: Current ROCE and growth How will future ROCE and growth be different from current ROCE? This chapter analyzes current profitability The next chapter analyzes growth Forecasting and the Analysis of Current Profitability Establish the present: Analysis of profitability (in this chapter) Determine the current profitability (ROCE) and the factors that influence the profitability Determine transition from present to future: Projecting future profitability (in Part III) Determine factors that influence future profitability and describe how the future will be different from the present These correspond to steps 2 and 3 of fundamental analysis The reformulation of the balance sheet and income statement has put them into a form to carry out step 2 and to use them to forecast the future in step 3 Cutting to the Core: ROCE Drivers ROCE is decomposed into drivers over three levels of analysis: Effects of Leverage Analysis of Operating Profitability Analysis of Net Borrowing Costs Due to formatting restrictions, please manually replace this page with hardcopy of slide from file: <Analysis of Profitability (slide chart)> [windows name] analys~13>. ppt 关于艾滋病ppt课件精益管理ppt下载地图下载ppt可编辑假如ppt教学课件下载triz基础知识ppt [dos name] First-Level Breakdown: Analysis of Effects of Financial Leverage (FLEV) So, ROCE is a weighted return to operating activities and financing activities: or, = OI (After tax) / NOA (Return on Net Operating Assets) RNOA FLEV = NFO / CSE (Financial Leverage) NBC = NFE (after tax) / NFO (Net Borrowing Cost) SPREAD = RNOA – NBC (Operating Spread) Spread How Financial Leverage Explains the Difference Between ROCE and RNOA Financial Leverage: General Mills, Inc. General Mills, a large manufacturer of packaged foods, has had considerable stock repurchases over the years. At the end of fiscal 1998 common shareholder equity was only $190.2 million on net operating assets of $2.251 billion. Its financial leverage was a huge 5.745, based on average balance sheet amounts. The firm’s ROCE for 1998 was 121.6%. Further analysis reveals that this very high number is driven by the high leverage: ROCE = RNOA + [FLEV x (RNOA ?? NBC)] 121.6% = 21.6% + [5.745 x (21.6% ?? 4.2%)] ROCE can exaggerate underlying operational profitability: RNOA is 21.6% but the high financial leverage, combined with a SPREAD over a borrowing cost of 4.2%, yields a much higher ROCE. Beware of firms boasting high ROCE: is it driven by financial leverage? -If Question: What if the RNOA at General Mills fell to 3%? What A What would be the effect on ROCE? The answer is that the ROCE would fall to -3.9%: -3.9% = 3.0% + [5.745 x (3.0% ?? 4.2%)] The unfavorable leverage would produce a negative ROCE on a positive RNOA. Financial Leverage: Microsoft, Corp. Microsoft Corp has been very profitable. For fiscal 1998 the firm reported an ROCE of 36.3% on average common equity of $13.702 billion. But Microsoft had no financing debt other than $980 million of convertible preferred stock. And it had considerable financial assets of $11.447 billion from cash generated from its operations. The return on average net financial assets was 8.0% (a significant portion from unrealized gains on financial assets). The reported ROCE masks the profitability of operations: The RNOA of 179.4% is weighted down by return on financing activities in the overall ROCE. A What-If Question: Microsoft has regular stock repurchases. In fiscal 1998 the company used $2.796 billion of its financial assets to repurchase stock. What would the ROCE have been had it not undertaken the stock repurchase? The answer: With $2.796 billion more in average financial assets and common equity, the NFA to CSE ratio would have been 0.863 rather than 0.835, and the ROCE would have been: 31.5% = 179.4% ?? [0.863 x (179.4% ?? 8.0%)] Stock repurchases (and dividends) increase ROCE. The Effects of Operating Liability Leverage (OLLEV) Operating liabilities lever the Return on Net Operating Assets What would be the operating profitability without operating liabilities? where Implicit Interest on Operating Liabilities = Short-term Borrowing Rate x Operating Liabilities The Effect of OLLEV: where RNOA = ROOA + (OLLEV x OLSPREAD) Operating Liability Leverage: General Mills, Inc. General Mills had average net operating assets of $2.310 billion during fiscal 1998 of which $1.159 billion were in operating liabilities other than deferred taxes and pension liabilities. Thus its operating liability leverage ratio was 0.50. Its borrowing rate on its short-term notes payable was 5.4%, or 3.4% after tax. It reported operating income of $499.6 million, but applying the after-tax short-term borrowing rate to operating liabilities other than deferred tax and pension liabilities, this operating income includes implicit after-tax interest charges of $39.4 million. So, The effect of operating liability leverage is favorable: A What-If Question: What-if suppliers were to charge the short-term borrowing rate of 5.4% explicitly for the credit in accounts payable. What would be the effect on ROCE? The answer: Probably no effect. The interest would be an additional expense. But, to stay competitive, the supplier would have to reduce prices of goods sold to the firm by a corresponding amount so that the total price charged (in implicit plus explicit interest) remains the same. But supplier markets may not work as efficiently as this supposes, so firms can exploit operating liability leverage. Return on Net Operating Assets and Return on Assets Problems with ROA: Financial assets in denominator Financial income in numerator Operating liabilities not in denominator Net income is not comprehensive income Median ROA is 7.0% Median RNOA is 10.3% RNOA and ROA for Selected Firms, 1996 FLEV and Debt-to-Equity Ratios Problems with Debt-to-Equity ratio: Excludes financial assets (which effectively defease debt) Includes operating liabilities Median Debt-to-Equity is 1.17 Median FLEV is 0.40 Reformulated Financial Statements: Nike, Inc. Reformulated Statements of Common Stockholders’ Equity Nike, Inc. 1 Cash and cash equivalents are split between operating cash and cash investments. 2 Some accounts payable are interest bearing but this cannot be discovered. 3 Other liabilities are primarily long-term deferred endorsement payments for promotions. 4 Notes payable are interest bearing. 5 Preferred stock is less than $0.5 million. Reformulated Balance Sheets Nike, Inc. 1 Broken out from selling and administrative expenses in published income statement. 2 Included in “other expense” in income statement. The nonrecurring changes in 1995 and 1994 relate to shutdown of certain facilities. 3 Marginal tax rate was 38.5%, 38.5% and 39.1% in 1996, 1995 and 1994, respectively. Reformulated Income Statements Reformulated Financial Statements: Reebok International, Ltd. Reformulated Statements of Common Stockholders’ Equity Reebok International, Ltd. 1 Cash and cash equivalents divided between operating cash and cash investments. 2 Excludes dividends payable which is included in stockholders’ equity. Reformulated Balance Sheets Reebok International, Ltd. 1 Broken out from selling and administrative expenses in published income statement. 2 The change in 1995 is due to consolidation and streamlining of facilities and to the sale of the Avia subsidiary. 3 Marginal tax rate was 35.4%, 36.2% and 36.9% for 1996, 1995 and 1994, respectively. Reformulated Income Statements First Level Breakdown of ROCE: Nike, Inc. and Reebok Int’l, Ltd. Second-Level Breakdown of ROCE: Drivers of Operating Profitability Operating profit margin: The profitability of each dollar of sales Asset turnover: The ability to generate sales for a given asset base Effect of financial leverage Profit Margin and Asset Turnover Combinations for 238 Industries, 1963-96 1 2 3 4 5 6 7 Asset Turnover Typical Levels for ROCE, FLEV, OLLEV, RNOA, PM and ATO Source: Standard & Poor’s COMPUSTAT? Third-Level Breakdown of ROCE: Profit Margin Drivers PM = Sales PM + Other operating income PM by product or line of business benefit or expense? GM = Sales – Cost of Sales -Level Breakdown of ROCE: Asset Turnover Drivers Third Some times other measures are used: Days in Acc. Receivable = Acc. Receivable/ Avg. Sales per day Inventory Turnover = Cost of Sales / Avg. Inventories Acc. Payable Turnover = Purchases / Avg. Acc. Payable Third-Level Breakdown: Nike, Inc. and Reebok Int’l, Ltd. What-If Questions: Nike, Inc. and Reebok Int’l, Ltd Third-Level Breakdown: Analysis of Net Borrowing Cost Analysis of Net Borrowing Cost: Nike, Inc. The Analyst’s Checklist You should understand the following from this chapter: How ratios aggregate to explain Return on Common Equity (ROCE) How economic factors determine ratios How financial leverage affects ROCE How operating liability leverage affects ROCE The difference between Return on Net Operating Assets (RNOA) and Return on Assets (ROA) How profit margins, asset turnovers and their composite ratios drive RNOA How borrowing costs are analyzed How profitability analysis can be used to ask penetrating questions regarding the firm’s activities You should be able to do the following after reading this chapter: Calculate ratios that drive ROCE Demonstrate how ratios combine to yield the ROCE Perform a complete profitability analysis on reformulated financial statements Prepare a spreadsheet program based on the design in this chapter Answer “What-If” questions about a firm using the analysis in this chapter