8/10/2019 Seminar 5 Self-made Notes

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Class 5Financial Analysis

RATIO will convey meanings to the accounting numbers from FS. E.g. EPS, sales growth

Be aware of seasonal noise

ROE

Slide 11Great Framework for Presentation (5 years)

ROE= RNOA + FLEV (Spread of RNOA & NBC) or (RNOA - % Int after tax try to keep +ve)o FLEV = NFO/CSEo

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 FLEVLevel 2: Splitting Profitability and Efficiency

Level 3: Examine the components of Profitability (e.g. COGS/SALES, General admin expense/SALES, NetProfit/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 15If 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 Worki ng 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 29An increase in dividend payout ratio: more sustainable earnings (confidence), investing less for future opportunities, want

to hold less cash reserves

8/10/2019 Seminar 5 Self-made Notes

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Case 2INVENTEC Corporations

1. Context: providing business to business manufacturing, moves its operations from Taiwan to mainland China.Ten years latermargins declined from 10% to 3-4%

2. Issues/Questionsa. 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 ODMindustry?

3. Tools

Key WordsLogos of three competingSome were shipped via UPS from the Shanghai factory directly to customersNet 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%