Download CH 3 Objectives

*
Chapter 3
*How to standardize financial statements
for comparison purposes
*How to compute and interpret important
financial ratios
*The determinants of a firm’s profitability
and growth
*Understand the problems and pitfalls in
financial statement analysis
*
*
*Almost Everyone in the Business World
* Bankers – analyze loans and cash flow
* Portfolio Managers – projections of stock prices
* Marketing Managers – market penetration and impacts to profitability
* Human Resources – compensation analysis
* Senior Management – corporate strategy
* Sales Managers – commission rates on sales
* Internal Financial Analysts – profitability analysis
* Customer Service Managers – efficiency ratios
3
• Why does the firm want/need to borrow funds?
• What is the firm’s capital structure? How leveraged
are they?
• How will they pay it back? What kind of cash flows
are being generated by operations?
*
• How has the firm performed/what are future
expectations?
• How much RISK is inherent in the capital structure?
• What are the expected returns from the firm?
• What is firm’s competitive position?
*
* Need all info creditors and investors need PLUS:
* What operating areas have contributed to success and which
have not?
* What are strengths/weaknesses of company’s financial
position?
* What changes are indicated to improve future performance?
*
* Financial statements (and notes)
* Annual Report
* 10K and 10Q reports filed with SEC (EDGAR)
* Computerized data bases
* Info on industry norms/ratios
* Info on particular companies/industries/mutual
funds
* Websites
*
* Common size financial statements
* Financial ratios
* Trend analysis
* Industry comparisons
*
*
Firm A
Firm B
Sales
2531456.24
4561234.87
COGS
784564.54
1556456.24
1746891.70
3004778.63
Gr. Profit
*
Firm A
Sales
COGS
Gr. Profit
Firm B
2,531,456
4,561,234
784,564
1,556,456
1,746,891
3,004,778
*
Firm A
Sales
COGS
Gr. Profit
Firm B
2,531,456
100%
4,561,234
100%
784,564
31%
1,556,456
34%
1,746,891
69%
3,004,778
66%
*
* Common-Size Balance Sheets
* All accounts = percent of total assets (%TA)
* Common-Size Income Statements
* All line items = percent of sales (%SLS)
* Standardized statements are useful for:
* Comparing financial information year-to-year
* Comparing companies of different sizes, particularly within the
same industry
*
* Diameter
* Earth 12,756 KM
* Sun 1,392,000 KM
* Mass
* Earth 1
* Sun 330,000
*
*
*
* Ratios need to be compared to something
* Time-Trend Analysis
* How the firm’s performance is changing through time
* Internal and external uses
* Peer Group Analysis
* Compare to similar companies or within industries
* SIC and NAICS codes
* Liquidity ratios or Short-term solvency
* Financial leverage ratios or Long-term solvency ratios
* Asset management or Turnover ratios
* Profitability ratios
* Market value ratios
*
*
Profitability Ratios
* Measure the overall effectiveness of the firm’s
management.
22
*
Profitability Ratios
Gross Profit Margin =
Gross Profit
Sales
How effective is the firm at generating
revenue in excess of its cost of goods sold?
23
Balance Sheet
Excalibur Corporation
Cash
$175
Accounts Receivable 430
Inventories
625
Current Assets
$1,230
Plant & Equipment $2,500
Less:Acc. Depr.
(1,200)
Net Fixed Assets
$1,300
Total Assets
$2,530
Income Statement
Excalibur Corporation
Sales
$1,450
Cost of Goods Sold
875
Gross Profit
$575
Operating Expenses
45
Depreciation
200
Net Operating Income
$330
Interest Expense
60
Income Before Taxes
$270
Taxes (40%)
108
Net Income
$162
Common Dividends Paid
100
Addition to Retained Earnings $62
Gross
Profit
Margin
=
Accounts Payable
$115
S-T Notes Payable
115
Current Liabilities
$230
Bonds
$600
Owner’s Equity
Common Stock
$300
Capital in Excess of Par 600
Retained Earnings
800
Total Owners’ Equity $1,700
Total Liabilities and
Owners Equity
$2,530
Gross Profit
Sales
Gross Profit Margin =
$575
$1,450
= 39.7%
Balance Sheet
Excalibur Corporation
Cash
$175
Accounts Receivable 430
Inventories
625
Current Assets
$1,230
Plant & Equipment $2,500
Less:Acc. Depr.
(1,200)
Net Fixed Assets
$1,300
Total Assets
$2,530
Income Statement
Excalibur Corporation
Sales
$1,450
Cost of Goods Sold
875
Gross Profit
$575
Operating Expenses
45
Depreciation
200
Operating Income
$330
Interest Expense
60
Income Before Taxes
$270
Taxes (40%)
108
Net Income
$162
Common Dividends Paid
100
Addition to Retained Earnings $62
Accounts Payable
$115
S-T Notes Payable
115
Current Liabilities
$230
Long-term Debt
$600
Owner’s Equity
Common Stock
$300
Capital in Excess of Par 600
Retained Earnings
800
Total Owners’ Equity $1,700
Total Liabilities and
Owners Equity
$2,530
Operating
Operating Income
Profit
=
Sales
Margin
Oper. Profit Margin =
$330
$1,450
= 22.8%
*
Profitability Ratios
Note: Net Income equals Earnings Available to CS
when there is no preferred stock.
Net Profit Margin or
Profit Margin
=
Net Income
Sales
How much net profit is being generated from
each dollar of sales? 26
Balance Sheet
Excalibur Corporation
Assets
Liabilities
Cash
$175 Accounts Payable
$115
Accounts Receivable 430 S-T Notes Payable
115
Inventories
625 Current Liabilities
$230
Current Assets
$1,230 Long-term Debt
$600
Plant & Equipment $2,500 Owner’s Equity
Less:Acc. Depr.
(1,200) Common Stock
$300
Net Fixed Assets
$1,300 Capital in Excess of Par 600
Total Assets
$2,530 Retained Earnings
800
Total Owners’ Equity $1,700
Income Statement
Total Liabilities and
Excalibur Corporation
Owners Equity
$2,530
Sales
$1,450
Cost of Goods Sold
Gross Profit
Operating Expenses
Depreciation
Operating Income
Interest Expense
Income Before Taxes
Taxes (40%)
Net Income
Common Dividends Paid
Addition to Retained Earnings
875
$575
45
200
$330
60
$270
108
$162
100
$62
Net
Profit
Margin
=
Net Profit Margin =
Net Income
Sales
$162
$1,450
= 11.2%
27
*
Profitability Ratios
Net Income
Total Assets
Return on Assets =
How effectively is the firm generating net
income from its assets ?
28
Balance Sheet
Excalibur Corporation
Assets
Liabilities
Cash
$175 Accounts Payable
$115
Accounts Receivable 430 S-T Notes Payable
115
Inventories
625 Current Liabilities
$230
Current Assets
$1,230 Long-term debt
$600
Plant & Equipment $2,500 Owner’s Equity
Less:Acc. Depr.
(1,200) Common Stock
$300
Net Fixed Assets
$1,300 Capital in Excess of Par 600
Total Assets
$2,530 Retained Earnings
800
Total Owners’ Equity $1,700
Total Liabilities and
Income Statement
Owners Equity
$2,530
Excalibur Corporation
Sales
$1,450
Cost of Goods Sold
875
Gross Profit
$575
Operating Expenses
45
Net Income
Return on
Depreciation
200
=
Operating Income
$330
Total Assets
Assets
Interest Expense
60
Income Before Taxes
$270
Taxes (40)
108
$162 = 6.4%
Net Income%
$162
ROA = $2,530
Common Dividends Paid
100
29
Addition to Retained Earnings $62
*
Profitability Ratios
Net Income
Equity
Return on Equity =
How well is the firm generating return to
its equity providers?
30
Balance Sheet
Excalibur Corporation
Assets
Liabilities
Cash
$175 Accounts Payable
$115
Accounts Receivable 430 S-T Notes Payable
115
Inventories
625 Current Liabilities
$230
Current Assets
$1,230 Long-term Debt
$600
Plant & Equipment $2,500 Owner’s Equity
Less:Acc. Depr.
(1,200) Common Stock
$300
Net Fixed Assets
$1,300 Capital in Excess of Par 600
Total Assets
$2,530 Retained Earnings
800
Total Owners’ Equity $1,700
Income Statement
Total Liabilities and
Excalibur Corporation
Owners Equity
$2,530
Sales
$1,450
Cost of Goods Sold
Gross Profit
Operating Expenses
Depreciation
Operating Income
Interest Expense
Income Before Taxes
Taxes (40%)
Net Income
Common Dividends Paid
Addition to Retained Earnings
875
$575
45
200
$330
60
$270
108
$162
100
$62
Return on Equity =
ROE =
$162
$1,700
Net Income
Equity
= 9.53%
*
Liquidity Ratios
• Measure the ability of the firm to
meet its short-term financial obligations.
Current Assets
Current Ratio =
Current Liabilities
Are there sufficient current assets to pay off
current liabilities? What is the cushion of
safety?
32
Balance Sheet
Excalibur Corporation
Assets
Liabilities
Cash
$175 Accounts Payable
$115
Accounts Receivable 430 S-T Notes Payable
115
Inventories
625 Current Liabilities
$230
Current Assets
$1,230 Long-term Debt
$600
Plant & Equipment $2,500 Owner’s Equity
Less:Acc. Depr.
(1,200) Common Stock
$300
Net Fixed Assets
$1,300 Capital in Excess of Par 600
Total Assets
$2,530 Retained Earnings
800
Total Owners’ Equity $1,700
Total Liabilities and
Owners Equity
$2,530
Current Ratio =
Current Assets
Current Liabilities
Current Ratio = $1,230 = 5.35x
$230
33
*
Liquidity Ratios
*Measure the ability of the firm to meet
its short-term financial obligations.
Quick Ratio =
Current Assets - Inventory
Current Liabilities
What happens to the firm’s ability to repay current
liabilities after what is usually the least liquid of the
current assets is subtracted?
34
Balance Sheet
Excalibur Corporation
Assets
Liabilities
Cash
$175 Accounts Payable
$115
Accounts Receivable 430 S-T Notes Payable
115
Inventories
625 Current Liabilities
$230
Current Assets
$1,230 Long-term Debt
$600
Plant & Equipment $2,500 Owner’s Equity
Less:Acc. Depr.
(1,200) Common Stock
$300
Net Fixed Assets
$1,300 Capital in Excess of Par 600
Total Assets
$2,530 Retained Earnings
800
Total Owners’ Equity $1,700
Total Liabilities and
Owners Equity
$2,530
Quick Ratio =
Current Assets - Inventory
Current Liabilities
Acid-Test Ratio =
$1,230 -$625
= 2.63x
$230
35
*
Leverage Ratios
• Measure the relative size of the firm’s debt load
and the firm’s ability to pay off the debt.
36
*
Debt Ratios
Debt Ratio =
Total Debt
Total Assets
What proportion of the firm’s assets is
financed with debt?
37
Balance Sheet
Excalibur Corporation
Assets
Liabilities
Cash
$175 Accounts Payable
$115
Accounts Receivable 430 S-T Notes Payable
115
Inventories
625 Current Liabilities
$230
Current Assets
$1,230 Long-term Debt
$600
Plant & Equipment $2,500 Owner’s Equity
Less:Acc. Depr.
(1,200) Common Stock
$300
Net Fixed Assets
$1,300 Capital in Excess of Par 600
Total Assets
$2,530 Retained Earnings
800
Total Owners’ Equity $1,700
Income Statement
Total Liabilities and
Excalibur Corporation
Owners Equity
$2,530
Sales
$1,450
Cost of Goods Sold
Gross Profit
Operating Expenses
Depreciation
Operating Income
Interest Expense
Income Before Taxes
Taxes (40%)
Net Income
Common Dividends Paid
Addition to Retained Earnings
875
$575
45
200
$330
60
$270
108
$162
100
$62
Debt Ratio =
Total Debt
Total Assets
Debt Ratio = $230 + $600 = 33%
$2,530
*
Debt Ratios
Times Interest Earned Ratio =
Operating Income
Interest Expense
What is the firm’s ability to repay interest
payments from its operating income?
39
Balance Sheet
Excalibur Corporation
Assets
Liabilities
Cash
$175 Accounts Payable
$115
Accounts Receivable 430 S-T Notes Payable
115
Inventories
625 Current Liabilities
$230
Current Assets
$1,230 Long-term Debt
$600
Plant & Equipment $2,500 Owner’s Equity
Less:Acc. Depr.
(1,200) Common Stock
$300
Net Fixed Assets
$1,300 Capital in Excess of Par 600
Total Assets
$2,530 Retained Earnings
800
Total Owners’ Equity $1,700
Income Statement
Excalibur Corporation
Total Liabilities and
Sales
$1,450
Owners Equity
$2,530
Cost of Goods Sold
875
Gross Profit
$575
Operating Expenses
45
Depreciation
200
Times
Operating Income
Operating Income
$330
Interest
=
Interest Expense
60
Interest Expense
Earned
Ratio
Income Before Taxes
$270
Taxes (40%)
108
$330
Net Income
$162
TIE Ratio =
= 5.50x
Common Dividends Paid
100
$60
Addition to Retained Earnings $62
40
*
Debt Ratios
Equity Multiplier
=
Total Assets
Total Equity
What is the firm’s investment in assets
relative to it’s equity?
41
Balance Sheet
Excalibur Corporation
Assets
Liabilities
Cash
$175 Accounts Payable
$115
Accounts Receivable 430 S-T Notes Payable
115
Inventories
625 Current Liabilities
$230
Current Assets
$1,230 Long-term Debt
$600
Plant & Equipment $2,500 Owner’s Equity
Less:Acc. Depr.
(1,200) Common Stock
$300
Net Fixed Assets
$1,300 Capital in Excess of Par 600
Total Assets
$2,530 Retained Earnings
800
Total Owners’ Equity $1,700
Income Statement
Excalibur Corporation
Total Liabilities and
Sales
$1,450
Owners Equity
$2,530
Cost of Goods Sold
875
Gross Profit
$575
Operating Expenses
45
Depreciation
200
Equity
Total Assets
Operating Income
$330
Multiplier
=
Interest Expense
60
Total Equity
Income Before Taxes
$270
Taxes (40%)
108
$2,530
Net Income
$162
Eq Mult=
Common Dividends Paid
100
$1,700 = 1.49x
Addition to Retained Earnings $62
42
*
Efficiency Ratios
* Help assess how effectively the firm is using assets to
generate sales.
43
*
Efficiency Ratios
365 days
Rec. turnover
Days Sales in Receivables or
Average Collection Period =
How long does it take for the firm on average
to collect its credit sales from customers?
44
Balance Sheet
Excalibur Corporation
Assets
Liabilities
Cash
$175 Accounts Payable
$115
Accounts Receivable 430 S-T Notes Payable
115
Inventories
625 Current Liabilities
$230
Current Assets
$1,230 Bonds
$600
Plant & Equipment $2,500 Owner’s Equity
Less:Acc. Depr.
(1,200) Common Stock
$300
Net Fixed Assets
$1,300 Capital in Excess of Par 600
Total Assets
$2,530 Retained Earnings
800
Total Owners’ Equity $1,700
Income Statement
Total Liabilities and
Excalibur Corporation
Owners Equity
$2,530
Sales
$1,450
Cost of Goods Sold
Gross Profit
Operating Expenses
Depreciation
Operating Income
Interest Expense
Income Before Taxes
Taxes (40%)
Net Income
Common Dividends Paid
Addition to Retained Earnings
875
$575
45
200
$330
60
$270
108
$162
100
$62
Days’ sales
in
receivables
DSR =
365
$1,450/430
365 days
Rec turn
= 108 days
Days in a
year
*
Efficiency Ratios
Inventory Turnover Ratio =
COGS
Inventory
Is inventory efficiently translating into
sales for the firm?
46
Balance Sheet
Excalibur Corporation
Assets
Liabilities
Cash
$175 Accounts Payable
$115
Accounts Receivable 430 S-T Notes Payable
115
Inventories
625 Current Liabilities
$230
Current Assets
$1,230 Long-term Debt
$600
Plant & Equipment $2,500 Owner’s Equity
Less:Acc. Depr.
(1,200) Common Stock
$300
Net Fixed Assets
$1,300 Capital in Excess of Par 600
Total Assets
$2,530 Retained Earnings
800
Total Owners’ Equity $1,700
Income Statement
Total Liabilities and
Excalibur Corporation
Owners Equity
$2,530
Sales
$1,450
Cost of Goods Sold
Gross Profit
Operating Expenses
Depreciation
Operating Income
Interest Expense
Income Before Taxes
Taxes (40%)
Net Income
Common Dividends Paid
Addition to Retained Earnings
875
$575
45
200
$330
60
$270
108
$162
100
$62
Inventory
Turnover =
Ratio
Inventory Turnover =
COGS
Inventory
$875
$625
= 1.4x
*
Efficiency Ratios
Sales
Fixed Asset Turnover Ratio = Net Fixed Assets
How effective is the firm in using its fixed
assets to help generate sales?
48
Balance Sheet
Excalibur Corporation
Assets
Liabilities
Cash
$175 Accounts Payable
$115
Accounts Receivable 430 S-T Notes Payable
115
Inventories
625 Current Liabilities
$230
Current Assets
$1,230 Long-term Debt
$600
Plant & Equipment $2,500 Owner’s Equity
Less:Acc. Depr.
(1,200) Common Stock
$300
Net Fixed Assets
$1,300 Capital in Excess of Par 600
Total Assets
$2,530 Retained Earnings
800
Total Owners’ Equity $1,700
Income Statement
Total Liabilities and
Excalibur Corporation
Owners Equity
$2,530
Sales
$1,450
Cost of Goods Sold
Gross Profit
Operating Expenses
Depreciation
Operating Income
Interest Expense
Income Before Taxes
Taxes (40%)
Net Income
Common Dividends Paid
Addition to Retained Earnings
875
$575
45
200
$330
60
$270
108
$162
100
$62
Fixed Asset
Turnover
Ratio
=
Sales
Net Fixed Assets
Fixed Asset Turnover =
$1,450
= 1.12x
$1,300
*
Efficiency Ratios
Total Asset Turnover Ratio =
Sales
Total Assets
How effective is the firm in using its overall
assets to generate sales?
50
Balance Sheet
Excalibur Corporation
Assets
Liabilities
Cash
$175
Accounts Receivable 430
Inventories
625
Current Assets
$1,230
Plant & Equipment $2,500
Less:Acc. Depr.
(1,200)
Net Fixed Assets
$1,300
Total Assets
$2,530
Income Statement
Excalibur Corporation
Sales
$1,450
Cost of Goods Sold
875
Gross Profit
$575
Operating Expenses
45
Depreciation
200
Operating Income
$330
Interest Expense
60
Income Before Taxes
$270
Taxes (40%)
108
Net Income
$162
Common Dividends Paid
100
Addition to Retained Earnings $62
Accounts Payable
$115
S-T Notes Payable
115
Current Liabilities
$230
Long-term Debt
$600
Owner’s Equity
Common Stock
$300
Capital in Excess of Par 600
Retained Earnings
800
Total Owners’ Equity $1,700
Total Liabilities and
Owners Equity
$2,530
Total Asset
Turnover =
Total Asset Turnover =
Sales
Total Assets
$1,450
$2,530
= 0.57x
51
*
Market Value Ratios
Price to Earnings Ratio =
(PE)
Price per Share
Earnings per Share
How much are investors willing to pay per
dollar of earnings of the firm?
(Indicator of investor’s attitudes toward
future prospects of the firm and of the
firm’s risk.)
52
Balance Sheet
Excalibur Corporation
Assets
Liabilities
Cash
$175 Accounts Payable
$115
Accounts Receivable 430 S-T Notes Payable
115
Inventories
625 Current Liabilities
$230
Current Assets
$1,230 Long-term Debt
$600
Plant & Equipment $2,500 Owner’s Equity
Less:Acc. Depr.
(1,200) Common Stock
$300
Net Fixed Assets
$1,300 Capital in Excess of Par 600
Total Assets
$2,530 Retained Earnings
800
Total Owners’ Equity $1,700
Income Statement
Total Liabilities and
Excalibur Corporation
Owners Equity
$2,530
Sales
$1,450
Additional Info:
100 shares
$20.00 per
share
Cost of Goods Sold
Gross Profit
Operating Expenses
Depreciation
Operating Income
Interest Expense
Income Before Taxes
Taxes (40%)
Net Income
Common Dividends Paid
Addition to Retained Earnings
875
$575
45
200
$330
60
$270
108
$162
100
$62
P/E
=
Ratio
P/E ratio =
Price/Share
EPS
$20
= 12.35x
$162/100
53
*
Market Value Ratios
Market (price) to Book Ratio = Price per Share
Book Value per Share
How much are investors willing to pay per
dollar of book value?
54
Additional Info:
100 shares
$20 per share
Balance Sheet
Excalibur Corporation
Assets
Liabilities
Cash
$175
Accounts Receivable 430
Inventories
625
Current Assets
$1,230
Plant & Equipment $2,500
Less:Acc. Depr.
(1,200)
Net Fixed Assets
$1,300
Total Assets
$2,530
Income Statement
Excalibur Corporation
Sales
$1,450
Cost of Goods Sold
875
Gross Profit
$575
Operating Expenses
45
Depreciation
200
Operating Income
$330
Interest Expense
60
Income Before Taxes
$270
Taxes (40%)
108
Net Income
$162
Common Dividends Paid
100
Addition to Retained Earnings $62
Market
to
=
Book
M/B =
Accounts Payable
$115
S-T Notes Payable
115
Current Liabilities
$230
Long-term Debt
$600
Owner’s Equity
Common Stock
$300
Capital in Excess of Par 600
Retained Earnings
800
Total Owners’ Equity $1,700
Total Liabilities and
Owners Equity
$2,530
Price/Share
Common Equity/ # shares
$20
$1,700/100
= 1.18x
*
Market Value Ratios
*Enterprise value = Total market value of the stock
+ Book value of all liabilities – Cash
*EBITDA ratio = Enterprise value / EBITDA
* EBITDA = EBIT + Depreciation & Amortization
*
* Dividend payout ratio (“1 – b”) = DPS / EPS
= Cash dividends / Net income
* Retention ratio (“b”) = (EPS – DPS) / EPS
= (Addition to Retained Earnings) / Net income
Summary of Excalibur Corporation Ratios
Ratio
Industry Excalibur
Profitability
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Return on Assets
Return on Equity
58
38%
20%
12%
9.0%
13.4%
40%
23%
11%
6.4%
9.5%
Ratio
Industry
Liquidity
Current Ratio
Quick Ratio
5.00x
3.00x
59
Excalibur
5.35x
2.63x
Ratio
Industry Excalibur
Debt
Debt Ratio
Times Interest Earned
Equity Multiplier
60
35%
7.0x
?x
33%
5.5x
1.49x
Ratio
Industry Excalibur
Asset Activity
Avg. Collection Period
Inventory Turnover
Fixed Asset Turnover
Total Asset Turnover
61
90 days
3.0x
1.0x
0.75x
108 days
1.4x
1.1x
.57x
Ratio
Industry Excalibur
Market Value
PE Ratio
Market to Book
18.0
5.3
62
12.4
4.2
*
*
* Ratio Analysis generally involves an examination of
related ratios.
* Comparison of these relationships over time helps to
identify the company’s strengths and weaknesses.
* Walmart ROE = 21%
* Target ROE = 15%
* Why is Walmart outperforming?
64
Return on Assets (ROA)
Return
on
Assets
Net Inc.
Assets
=
Net
x
Profit
Margin
= Net Inc.
Sales
Total
Asset
Turnover
x
Sales
Assets
*
Target
Net Profit Asset
Margin
Turnover
4.0%
1.45
Wal-Mart 3.6%
2.40
Which would you prefer?
*
Return
=
on
Equity
Net
Profit x
Margin
Net Inc.
=
Equity
Net Inc.
Sales
Total
x
Asset
Turnover
x
67
Sales
Assets
Equity
Multiplier
x
Assets
Equity
*
Target
Net Profit Asset
ROA
Margin
Turnover
4.0%
1.45
5.8%
Wal-Mart 3.6%
2.40
8.6%
*
Target
Net
Profit
Margin
4.0%
Wal-Mart 3.6%
Asset
Equity
ROE
Turnover Multiplier
1.45
2.5
15%
2.40
2.4
21%
What is Target’s debt ratio?
What debt ratio would Target need for ROE = 21%?
*The DuPont approach is nice because it
divides the firm into three tasks
*expense management
*(measured by the profit margin)
*asset management
*(measured by asset turnover)
*debt management
*(measured by the equity multiplier)
Wal-Mart
Sears
Profit M.
4%
6%
Ass.Turn.
3
1.5
ROA
?
?
Eq. Mult.
1
2
ROE
?
?
*
Wal-Mart
Sears
Profit M.
4%
6%
Ass.Turn.
3
1.5
ROA
12%
9%
Eq. Mult.
1
2
ROE
?
?
*
Wal-Mart
Sears
Profit M.
4%
6%
Ass.Turn.
3
1.5
ROA
12%
9%
Eq. Mult.
1
2
ROE
12%
18%
*
*
* Conglomerates
* No readily available comparables
* Global competitors
* Different accounting procedures
* Different fiscal year ends
* Differences in capital structure
* Seasonal variations and one-time events