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Profitability
Profitability
Analyzing Profitability
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Return on Investment
Uses
▪ Managerial effectiveness
▪ Profitability
▪ Planning & Control
Variations
▪ Return on net operating assets
▪ Return on capital employed
ROE – Dupont Analysis
ROE = Net Income
Shareholders Equity
= NI X Sales
Sales Shareholders Equity
= NI X Sales X Assets
Sales Assets Shareholders Equity
The denominator of the equation, net operating assets (NOA), is equal to operating
assets less operating liabilities
Return on net operating assets = Net operating profit margin x Net operating asset turnover
Operating assets and liabilities are those necessary to conduct the company’s business
Operating assets include cash, accounts receivable, inventories, prepaid expenses, deferred tax assets,
property, plant, and equipment (PPE), and long-term investments related to strategic acquisitions (such
as equity method investments, goodwill, and acquired intangible assets).
Operating liabilities include accounts payable and accrued expenses, and long term operating liabilities,
such as pensions and other postretirement (OPEB) liabilities and deferred income tax liabilities.
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ROCE
ROCE = RNOA + (LEV x Spread)
Term Definition
LEV (financial leverage) . . . . . . . . . . . . . . . . Average NFO/Average equity
NFO (net financial obligations) . . . . . . . . . . . Interest-bearing liabilities less marketable securities
and other nonoperating assets (or NOA Equity)
Spread. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RNOA–NFR
NFR (net financial rate). . . . . . . . . . . . . . . . . NFE/Average NFO
NFE (net financial expense). . . . . . . . . . . . . . Interest expense less investment returns from
nonoperating assets
Growth Rates