FINANCIAL

INDICATORS

FPIs
Financial performance
indicators (FPIs) analyse

profitability, liquidity and risk.

Profitability

How to analyse?

Sales margin
Earnings per share (EPS)
Return on capital employed (ROCE)
The secondary ratios: profit margin
asset turnover
Profit margin Asset turnover ROCE

Profitability

How to compare?

The change in ratios from one year to next.

The ratios being earned by other companies.
The choice of basis.
eg: similar industries, same shares

Liquidity

How to analyse?

The current ratio

The quick ratio

The accounts receivable payment period

The inventory turnover period
The accounts payable payment period

FPIs

Reporting a
performance evaluation

Horizontal analysis
A line-by-line comparison

Trend analysis
The extension of horizontal analysis over a greater
period of time.

Vertical analysis
A percentage of a total account balance

ROI
Return on investment (ROI)
= (Profit/Capital employed)100%
Shows how much profit has been made in
relation to the amount of capital invested.
Measurement
1. Profit after depreciation as a
percentage of net assets employed
2. Profit after depreciation as a
percentage of gross assets employed

ROI
Example

Using ROI to
make decisions

Book value of non-current assets $300,000

Net current assets $40,000
Net profit before tax -- $64,000
The non-current assets five separate items, each costing $60,000, which are
depreciated to zero over 5 years on a straight-line basis.
Bought a replacement for the asset that has just been withdrawn.
The groups cost of capital is 15%.
Division S has the opportunity of an investment costing $60,000, and yielding
an annual profit of $10,000.
Total capital employed $220,000
Exiting ROI = (64/220)*100% = 29.1%
ROI with new investment = ((64+10)/(220+60))*100% = 26.4%

RI

RI = profit charge for capital employed

Notional or imputed interest cost

RI

Residual income will increase

when investment earning

above the cost of capital are

undertaken and investments
earning below the cost of
capital are eliminated.

It dose not facilitate

comparisons between
investment centres, nor
dose it related the size of
a centres income to the
size of the investment

Residual income is more

flexible, since a different
cost of capital can be applied

to investment with different

risk characteristics

Disadvantage

VS

Advantage

RI
Bigger investment centers (asset size) are expected to generate a larger
residual income than smaller divisions. This occurs simply because they
are larger, and is not necessarily a result of management performance.

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EVA

Definition

an alternative absolute performance

measure, a specific type of RI.

EVA

72%
50%

Formula : ( its calculation is similar to RIs, but

please make sure you dont get them mixed up!)

EVA = net operating profit after tax (NOPAT) capital charge

= net operating profit after tax (NOPAT)
weighted average cost of capital(WACC) * net assets

68%

EVA
As a specific type of RI, comparisons of
calculations between RI and EVA

Similarities: interests are both excluded from NOPAT

EVA
Difference:
1. for NOPAT:
1. add back accounting depreciation
a. costs should be considered as2.investments
building depreciation
for future and
subtract economic
added back to NOPAT, such as goodwill, research, development expenditure
and advertising costs.
b. adjustments should be made to the depreciation charge
c. lease charge are excluded from NOPAT, add in capital employed
2. for net assets:
a. valued at replacement
b. increased by any costs that have been capitalized due to 1.a above

Operating profit: $18,500

development and launch costs are $6,000 (2 years)
Cost depreciation: $8,100
economic depreciation: $12,300
Non-current asset: $83,000 (replacement cost: $98,000)
working capital: $19,000
Rate: taxation: ignore
WACC:11% per annum

1. Calculation for NOPAT:

P274

Operating profit
Add back historical depreciation cost
Less economic depreciation
Add back development costs
One years amortization of development costs($6,000/2=$3,000)
NOPAT
2. Calculation for net assets:
Replacement costs of net assets ($98,000 + $ 19,000)
Capitalised costs ($6,000 - $3,000)
Economic value of net assets
3. Final calculation of EVA
EVA= 17.30 120.00*11%= 4.10

$ 000
18.5
8.10
(12.30)
6.00
(3.00)
17.30
117.00
3.00
120.00

EVA
Advantages:
1. create real wealth for the shareholders
2. less distorted by the accounting policies selected
3. easily understood
4. advertising and development costs dont immediately reduce the
EVA in the year of expenditure

Disadvantages:
1. relatively short-term measure
2. limited use as a guide to the future due to its basis of historical accounts
3. problematic to make adjustments
4. allowance for relative size must be made

THANK
YOU