Week 3. Analyzing Financial Performance Decomposing ROIC

Organic Revenue Growth

Growth achieved from existing businesses

Currency Effects

Gains/losses on foreign investments due to changes in relative value of assets denominated in foreign currency

Acquisitions

Purchasing of either partial or all shares of a company, usually leads to consolidating or mergers

Accounting Changes

Change in accounting principles, accounting estimates, or the reporting entity

Historical Operating Performance

Analysis of a company's past operational results, typically focusing on revenue, expenses, and profitability over a defined period

Measuring ROIC with Goodwill

Measures aggregate value creation for the company’s shareholders

Measuring ROIC without Goodwill

Measures the underlying performance company and is used to compare performance against peers and to analyze trends

Large Acqusitions

Companies will report pro forma statements that will recast historical financials as though it was completed at the beginning of the fiscal year

Target Company that Publicly Reports its Own Financial Data

You can construct pro forma statements manually by combining revenue of the acquirer and the target for the prior year

Pro Forma Financial Statements

Shows a company’s financial statements, and usually leaves out one-time expenses that are not part of normal company operations

Liquidity

The ability to meet short-term obligations

Aggressiveness of a Company’s Capital Structure (Measure with Liquidity)

Measure with the interest coverage ratio

Leverage

The ability to meet long-term obligations

Aggressiveness of a Company’s Capital Structure (Leverage)

Measured by computing the market-based debt-to-value ratio

Interest Coverage Ratio

Measure a company’s ability to meet short-term financial commitments using profits, as well as depreciation dollars

Return on Invested Capital (ROIC)

Assesses a company’s efficiency in allocating capital to profitable investments

Operating Profit Margin (OPM)

Measures how profitable a company makes on a dollar of sales after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax

Capital Efficiency (Cap Eff)

How well a company uses its capital to generate revenue

Fixed Asset Turnover Ratio (FATO, FAT)

Measures a company’s ability to generate net sales from its fixed-asset turnover

Depreciation

Accounting method used to allocate the cost of a tangible or physical asset over its useful life