Class 5 Financial Analysis

RATIO will convey meanings to the accounting numbers from FS. E.g. EPS, sales growth
Be aware of seasonal noise
ROE

Slide 11 Great Framework for Presentation (5 years)

ROE = RNOA + FLEV (Spread of RNOA & NBC) or (RNOA - % Int after tax try to keep +ve)
o FLEV = NFO/CSE
o FLEV * Spread
RNOA = Operating Income/NOA or [(OI/Sales) * (Sales/NOA)] aka Profit Margin * Asset Turnover [OA
OL = NOA]. [NOA NFO = CSE]
o Profit Margin Profitability, whilst Asset Turnover. Efficiency. Which of these 2 is the main driver?
NFO is net financial obligation = FL - FA
CSE is Common SH equity
NOA is net operating asset
FLEV is financial leverage
Level 1: Splitting RNOA and FLEV
Level 2: Splitting Profitability and Efficiency
Level 3: Examine the components of Profitability (e.g. COGS/SALES, General admin expense/SALES, Net
Profit/SALES etc.) and components of Efficiency directly from items in FS
In Exam: Only require to use Concurrent Value e.g. 2008 equity divide by 2008 liability
Slide 15
If a company achieves both high PM and asset turnover, there will be new competitors start entering into the industry,
pushing down the ROE
Slide 21
AFR Working Capital Performance 2012 ASX
Days Sales Outstanding
Days Inventory held
Days Payable outstanding
Cash to Cash
Trade Working capital/sales
EBITDA/Sales
Slide 24
PPE related Costs: Installation Cost, Training Cost
Slide 29
An increase in dividend payout ratio: more sustainable earnings (confidence), investing less for future opportunities, want
to hold less cash reserves

Case 2 INVENTEC Corporations

1. Context: providing business to business manufacturing, moves its operations from Taiwan to mainland China.
Ten years later margins declined from 10% to 3-4%
2. Issues/Questions
a. Despite its growth and size, why is Inventec not very profitable?
b. What are the drivers of the average profitability of the Original Design and Manufacturing Industry?
c. What are the key factors that a company like Inventec needs to manage to earn above-average profits in
this industry
d. Why is the Indian software industry, on average, so much more profitable than the Chinese ODM
industry?
3. Tools
Key Words
Logos of three competing
Some were shipped via UPS from the Shanghai factory directly to customers

Net Margins had dropped from about 10 % in 2001 to just 3-4% for leading firms, and below 1%
Concerns about underutilization
Factors to impress SH: Low labour, Overhead & Material costs, efficient and experienced employees, Good quality
control, Good relationship with suppliers and regulators
Factors to impress Clients: Financial sustainable, Good R&D, On time delivery/supply, Quality, Highly Equipped
Exhibits
1A & 1B : Large buildings (PPE) = Large Operations. Associate it with asset turnover
2: Poor performance
5: Industry Analysis (Inventec relative to other competitors): ROA is the lowest in the industry, slim net margins
etc. makes sense to Exhibit 2
6: EMS is more diversified than ODM
7: EMS is better performed than ODM in text, however ODM is better performed in figures than EMS
8: Bargining power
9: return per annual for asset (1/4) ln (54226/34910) = 11.6% pa return per annual for revenue = 18.7%...
return per annual for net income = -11.1%