A New Look at Ratios Using Reformulated Numbers

Transcription

1 A New Look at Ratios Using Reformulated Numbers Dr. Ron Lazer Session Topics Review Reformulation of Financial Statements: Reformulated Ratios and Decomposition Eample: Panera Bread FSA Reformulated Ratios 1

2 FSA Reformulated Ratios 2

3 Reformulated Statements of Stockholders FSA Reformulated Ratios 3

4 The Standard Balance Sheet The Typical Reformulated Balance Sheet FSA Reformulated Ratios 4

5 The Standard Income Statement The Reformulated Income Statement FSA Reformulated Ratios 5

6 The Reformulated Income Statement (cont.) Traditional ROA Return on Assets Definition of ROA: Net Profit ROA = AverageTotal Assets Net Profit = Net Income + Interest Epense (1 Ta rate) + Minority Interest in Earnings Decomposing ROA: Net Profit Sales ROA = Sales Assets ROA= Profit Margin * Assets Turnover FSA Reformulated Ratios 6

7 Problems with Traditional ROA Intermingles Financing and Operating Net Income is not Comprehensive Financial Assets are in denominator Operating Liabilities are not in denominator Return on Net Operating Assets This is the return on operating activities: (not affected by firm s level of debt, i.e. financing decisions): Net Operating Profit After Ta (NOPAT) Return on Net Operating Assets (RNOA) = Average Net Operating Assets (NOA) This is how much the firm pays for debt (financing) Net Non-operating Epense Percentage: NNEP = Net Non - Operating Epenses (NNE) Average Net Non Operating Obligations () Ron Lazer FSA Reformulated Ratios 7

8 ROA vs. RNOA Total Assets vs. NOA (Financial Assets (FA) ecluded from NOA, Operating Liabilities (OL) included) Numerator: NI adjusted for Interest vs. NOPAT RNOA usually > ROA, because NOA < Total Assets RNOA = NOPM NOAT margin effect turnover effect where NOPM = NOPAT/Sales and NOAT = Sales/NOA Value of RNOA Framework Company Comparison Benefits Changes in company s accounting over time Adjustments easy to eecute and understand impact on profitability, growth and leverage Accounting Quality Benefits Effects of manipulations that alter numerator NOPAT will have predictable and value relevant impact on denominator NOA FSA Reformulated Ratios 8

9 Value of RNOA Framework Valuation Benefits Forecasting focused on value relevant items DCF can be streamlined when scenario has path for profitability and growth Risk Analysis Benefits Useful for adjusting for off-bs items Useful when understanding a firm s coverage, solvency and liquidity ratios Traditional ROE Return on We can decompose ROE into several components: ROE = NI Sales Sales Assets Assets ROE = NI Margin * Asset Turnover * Total Leverage FSA Reformulated Ratios 9

10 Traditional ROE Problems with Decomposition The basic ROE model doesn t separate the impact of operating decisions from the impact of financing decisions on ROE. There is a tradeoff between Total Leverage and Net Operating Margin higher leverage (debt) higher interest payments lower net profit margins Hard to determine the impact of increase in leverage on ROE ROCE Reformulated ROCE = Net Income + OCI NOPAT - NNE ROCE = ROCE = ROCE = ROCE = NOPAT NOPAT NOA NOPAT NOA NNE NOA NNE + NNE Ron Lazer FSA Reformulated Ratios 10

11 ROCE Reformulated (cont.) ROCE = ROCE = ROCE = NOPAT NOA NOPAT NOA NOPAT NOA + (1 + + ) NOPAT NOA NNE NNE NNE ROCE = RNOA + RNOAFin Lev NNEPFin Lev ROCE = RNOA + (RNOA - NNEP) FLEV ROCE = RNOA + Spread FLEV Ron Lazer ROCE vs. RNOA ROCE can be restated as: RNOA + FLEV * (RNOA-NNEP) Is Financial Leverage helping or hurting a firm? Difference between RNOA and NNEP determines ROCE FSA Reformulated Ratios 11

12 The Case of Microsoft (2003) The Case of Microsoft (2003) Cont. How will the analysis change if Microsoft paid Dividends of $33B (as it did in 2004 ) FSA Reformulated Ratios 12

13 What s net? Further Profitability Analysis FSA Reformulated Ratios 13

14 Identifying Problem Company Names Best Buy FedE Caterpillar Abbot Laboratories NOPM NOAT 13.83% % % % 6.83 Panera Bread Co. FSA Reformulated Ratios 14

15 Appendi: Reformulation Terminology Appendi: Reformulation Terminology FSA Reformulated Ratios 15