Assessing Company Performance

1
Assessing Company Performance

• Business Strategy
• Term 3, 2003
• Paul Kerin

2
Assessing company performance

• How we will assess company performance in
  this course
• Common pitfalls
• Typical" performance benchmarks

3
Typical profit loss statement

• Total Revenue
  i.e. sales
• (Operating Expenses)
• EBIT also referred
  to as operating profit
• (Interest Expense)
• Profit Before Tax also referred to as
  PBT
• (Tax Expense)
• Profit After Tax also referred
  to as PAT or net proft

4
Typical balance sheet

• Current Assets
• Cash
• Accounts Receivable
• Inventory
• Etc
• Fixed Assets
• Property, Plant Equipment
• Goodwill
• Etc
• Total Assets

• Current Liabilities
• Accounts Payable
• Accrued Liabilities (eg wages pay)
• Short-term Debt
• Etc
• Long-term Liabilities
• Long-term Debt
• Provisions (eg, deferred taxes)
• Etc
• Equity
• Paid-in capital
• Retained earnings
• Etc
• Total Liabilities Equity

5
Alternative Measures

• Preferred measure
• Return on Invested Capital (ROICRONAROFE)
• EBIT / (LTLE) or
• EBIT/(FANWC)
• Other measures
• Return on Assets
  (ROA or ROTA)
• EBIT / Total Assets
• Return on Equity
  (ROE or ROSF)
• PAT / Equity
• EBIT Margin (operating profit margin)
• EBIT / Total Revenue

6
Why ROIC?

• Better than ROA
• IC TA CL
• CL are working, non-interest-bearing liabilities
  which help reduce invested capital
• Makes a difference on average, CL 27 of TA
  (ASX 2000)
• Supermarket example
• Better than ROE
• In understanding inherent industry attractiveness
  and in comparing the performance of different
  companies separates out operating performance
  from financing decisions
• Leveraging up can raise ROE for any given ROIC
• Better than EBIT margin
• ROIC EBIT margin / net asset turnover
• Net asset turnover varies enormously between and
  within industries
• Supermarket example

7
Ultimately these measures are all related ...
Based on 875 firms listed on the ASX in FY 2000.
Banks insurance companies and funds managers were
excluded
8
Gearing magnifies profits (and losses) and
changesthe ROE (but also risk) for any given ROIC
9
EBIT margins and asset intensity varies
dramatically between industries
Property Trusts
Telecommunications
Consumer Goods
Auto Parts Retailers
General Retailers
10
Assessing what is an acceptable (or excellent)
ROIC depends on a number of factors

• Which industry? (eg, consumer goods vs steel or
  airlines)
• Which country? (eg, Japan)
• Which time period? (eg, 1980s vs 1930s, one year
  vs multi-year, inflation)
• Etc

For our purposes, you may assume that the
benchmark returns given on page 7 are
appropriate, unless the case information leads
you to believe that they would not be (in the
real world, you would find benchmarks appropriate
to the industry/country/ time period/etc that you
are assessing)