ANALYSING FINACIAL STATEMENTS Terminology Invested capital = Equity + Total debt Capital employed = Equity + Long-term debt; It represents the long-term funds employed in the firm Total Asset = Invested capital + Interest-free credits Profit Hierarchy Gross profit = Net sales – Cost of sales (earlier it was called cost of goods sold) In a merchandising business it includes total costs incurred to acquire the merchandise and to bring it to the location and condition of sale. In a manufacturing business it includes total costs incurred to manufacture finished goods and to bring it to the location and condition of sale. Earnings before interest tax, depreciation and amortization (EBITDA) – It is also called cash profit EBITDA = Gross Profit + Depreciation on manufacturing facilities – Operating expenses (other than depreciation and amortization) Earnings before interest and tax (EBIT) – It measures operating profit if, other income is not material EBITDA – Depreciation and amortization Net profit = EBIT – Interest – Tax expense Net Operating Profit less Adjusted Tax (NOPAT) NOPAT = EBIT (1 – Tax rate) RATIOS Return on Investment Alternative ratios Return on invested capital (ROIC) = EBIT/Av. In Cap or NOPAT/Av. In Cap Return on Capital Employed (ROCE) = EBIT/Av. C E or NOPAT/Av. CE Return on Total Assets (ROA) = EBIT/Av. Assets or NOPAT/ Av. Assets Return on Equity (ROE) = Net profit/Av. Equity Decomposition of ROIC ROIC = NOPAT/Av. Invested Capital ...
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