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FINS3641-无代写
时间：2024-07-25
UNSW Business School
School of Banking and Finance
Course:
FINS3641:
Security Analysis and Valuation
Lecture Topic:
Financial Ratio Analysis (FRA)
To evaluate the past and predict the future
Lecturer:
Samuel Leung
Residual Income Valuation (RIV)
1. Know the difference between accounting profit and economic profit
1. Accounting profit
• Guided by ACCT principles and standards
• Bottom line of income statement which is
sales less operating, finance and tax
expenses
2. Economic profit
• Guided by opportunity cost (OC) concept
• Is sales less operating costs, tax expense
and charges for the use of debt and equity
capital based on missed opportunities
2. Know the measurement of residual income &
corresponding valuation model
1. Definition: RI = net profit – OC of equity
expected by the shareholders
2. Measurement: ! = ! −"×!#$ ! − " ×!#$
3. Model: % = % + ∑!&$' ()!# *" × -!#$$. *" ! or % + ∑!&$' /01!# *" ×-!#$$. *" !
4. Strength: An appealing model; …; Readily
available accounting data
Weakness: Aggressive ACCT practices; …;
Non-zero OCI items
3. Know the process of residual
income valuation RIV
1. Know when to use RIV
2. Conduct test to be assured of honourable
accounting practices
3. Adjust net profit for non-recurring income
statement items and OCI items that are
materially different from zero
4. Estimate residual income
5. Implement different residual income
valuation models
1
2Infographic designed by the PVCE
team of educational developers
1. Profitability: 1.1 ROIC - A quant-based measure
1.1.1 Definition of return on invested capital: ROICt = !"#$%&!'()*+,*- /012,03!"#
Net operating profit
(NOP)
Less adjusted tax
(LAT)
Profit from core operations
before
1. Interest expense
2. Tax expense
i.e. EBIT
Tax reported on income statement is based
on earnings inclusive of income from non-
operating assets and after interest expense
To compute adjusted tax or income tax
related to core operations
1. Lower reported tax by the amount of
tax paid on non-operating income
2. Raise reported tax by the amount of tax
savings from interest expense
i.e. Operating cash tax
Invested capital
Cumulative amount of
investments in fixed
operating assets and
operating working capital
3
1. Profitability 1.1 ROIC - A quant-based measure
1.1.2 Fundamental drivers of ROIC
ROIC = !"#$%&2()*+,*- 4012,03
= 56'& 781*90,2(: 40+; ,0< 2()*+,*- 4012,03
= 56'& 756'& ×81*90,2(: 40+; ,0< 90,* 2()*+,*- 4012,03
= 56'& × (? 7 81*90,2(: 40+; ,0< 90,*) 2()*+,*- 4012,03
= 56'&2()*+,*- 4012,03 × 1 − ℎ
= 56'&9*)*(A* × 9*)*(A*2()*+,*- 4012,03× 1 − ℎ
Return on
invested
capital
1.
Operating
margin
3.
Operating
cash tax
rate
2. Invested
capital
turnover
4
1.1.2 Fundamental drivers of ROIC
1 Operating margin: Measurement of EBIT
Accounting-wise, EBIT = Sales – COGS – SG&A expenses – depn of PP&E
In practice:
EBIT = Sales
– [COGS – restructuring charges]
– [SG&A expenses – interest component of OL rental payment – expenses related to pensions]
– Depn of research asset
COGS SG&A expenses
Often includes
restructuring
charges
Often include
1. Operating lease (OL) rental payment (pre-AASB 16)
2. Expenses related to pensions
3. Amortn expense
4. Depn expense related to PP&E
R&D expenditure
Is often written off in the year
of occurrence, but R&D
expenses are intended to
generate future benefits in the
same fashion as PP&E
5
Notes to the Financial Statements
Note 2: Revenue and expenses, p 82
Depreciation of fixed assets 156.2
Amortisation of intangibles 25.1
Rental expenses relating to OL 40.7
Employee benefits expense: salaries & wages, …, defined benefit & contribution plans 1247.6
Note 5: People Costs
Defined benefit plans 26.7
Defined contribution plans 25.5
EBIT = Sales
– [COGS – restructuring charges]
– [SG&A expenses – interest component of OL rental payment
– expenses related to pensions ]
– depn of research asset
1.1.2 Fundamental drivers of ROIC
Income Statement: CSL Annual Report 2015
Continuing operations Notes US$m
Sales revenue 2 5,458.6
Cost of sales (2,605.9)
Gross profit 2,852.7
Other revenue 2 169.4
R&D expenses 6 (462.7)
Selling and marketing exp (498.3)
General & admin exp (287.5)
Finance costs 2 (59.6)
Profit before income tax exp 1,714.0
Income tax expense 3 (335.0)
Net profit for the period 1,379.0
1 Operating margin: Illustrated example based on CSL FY2015
1. Refer to Appendix 1 for estimation of the interest component of OL rental payment in the amount of US$13m
2. Refer to Appendix 2 for estimation of depn of capitalized research asset in the amount of US$195m
6
1.1.2 Fundamental drivers of ROIC
1 Operating margin: Illustrated example based on CSL FY2015
7
COGS 2,605.9
Less: Restructuring charges -
COGS, net of restructuring charges 2,605.9
Selling and marketing expenses (S&M) 498.3
General and administrative expenses (G&A) 287.5
SG&A 785.8
Less: Interest component of OL rental payment 13.0
Less: Defined benefit plans 26.7
Less: Defined contribution plans 25.5
SG&A, adjusted 720.6
Sales 5,458.6
Less: COGS, net of restructuring charges 2,605.9
Less: SG&A, adjusted 720.6
Less: Depreciation of R&A assets 195.0
EBIT 1,937.1
EBIT 1,937.1
Sales 5,458.6
Operating margin 35.5%
Note: R&D
expenses are NOT
deducted
Appendix 1: Implicit annual interest expense for FY 2015 related to
operating lease debt at the beginning of the FY 2015 or end of FY2014
Schedule of operating lease commitments
Timing Amount US$m Years from 2014
2015 39.8 1
2016 30.75 2
2017 30.75 3
2018 30.75 4
2019 30.75 5
2020 32.425 6
2021 32.425 7
2022 32.425 8
2023 32.425 9
2024 32.425 10
2025 32.425 11
2026 32.425 12
2027 32.425 13
Total 422.2
AR 2014; Note 13 OL commitments, p 121
Not later than one year 39.8
Later than 1 but not later than 5 yrs 123.0
Later than five years 259.4
Total 422.2
A discount rate of 4% is assumed and
applied to future lease commitments
Given the value of the operating lease
debt of US$ 325.0m at the beginning of
FY 2015 and the assumed cost of debt
of 4%, implicit interest charge related
to operating lease rental expense for
FY2015 is US$ 13.0m
FY discount rate PV US$m
4% 38.3
4% 28.4
4% 27.3
4% 26.3
4% 25.3
4% 25.6
4% 24.6
4% 23.7
4% 22.8
4% 21.9
4% 21.1
4% 20.3
4% 19.5
325.0
8
Appendix 2: Depn expense related to capitalised R&D expenses for FY 2015
Assume life of R&D expenses = 15 years
T = 0: CSL spent US$463m on R&D in FY2015. This is like
paying for a brand new asset. Therefore
• The whole amount 463 * 1 is capitalised.
• No depn is charged against this R&D asset.
T = -1 CSL spent US$466m on R&D in FY2014. By the end of
FY2015, the asset would be 1 year old. Therefore
• ⁄$ $% of the amount would have been depreciated.
• The remaining fraction 1 - ⁄$ $% = 0.933 or residual
amount = 466 * 0.933 = 435 would be carried forward
to FY2015 as research asset.
• ⁄$ $% of the original amount would be depreciated in
FY2015 due to straight line depreciation.
T = -2 to -14 etc
T = -15 CSL spent US$28m on R&D in FY2000. By the end of
FY2015, the asset would be 15 year old. Therefore
• ⁄$% $% of the amount would have been depreciated.
• The remaining fraction 1 - ⁄$% $% = 0 or no residual value
would be carried forward to FY2015 as research asset.
• The last ⁄$ $% of the original amount would be depreciated
in FY2015
Time FYE
R&D
expense
Unamortised Portion
Fraction US$m
Depn exp for FY
2015
0 2015 463 1 463 n/a
-1 2014 466 0.933 435 = 466/15 = 31
-2 2013 427 0.867 370 = 427/15 = 28
-3 2012 370 0.800 296 … 25
-4 2011 323 0.733 237 22
-5 2010 278 0.667 185 19
-6 2009 226 0.600 136 15
-7 2008 202 0.533 108 13
-8 2007 150 0.467 70 10
-9 2006 120 0.400 48 8
-10 2005 110 0.333 37 7
-11 2004 72 0.267 19 5
-12 2003 54 0.200 11 4
-13 2002 49 0.133 7 3
-14 2001 44 0.067 3 3
Total
-15 2000 28 0.000 0 = 28/15= 2
RA = 2424 195
9
1.1.2 Fundamental drivers of ROIC
2 Invested capital turnover: Components of ICT
ICT = "#"$%"$#"'(") +,-.(,/
= "#"$%" > > E
To improve ICT, a firm may improve the turnover of its
Operating working capital Fixed assets
Net other long-term asset ℎ
ROIC
1.
Operating
margin
3.
Operating
cash tax
rate
2. Invested
capital
turnover
10
1.1.2 Fundamental drivers of ROIC
Consolidated Balance Sheet 2015 2014
CURRENT ASSETS
Cash and cash equivalents 556.8 608.7
Trade and other receivables 1003.7 953.4
Inventories 1755.6 1644.5
Current tax assets 20.4 0.7
Other financial assets (fin) 2.6 0.3
Total Current Assets 3339.1 3207.6
NON-CURRENT ASSETS
Other receivables 11.2 8.2
Other financial assets (fin) 0.5 1.0
PP&E 1841.3 1831.0
Deferred tax assets (nonOP) 274.4 299.1
Intangible assets (nonOP) 926.9 924.1
Retirement benefit assets (nonOP) 7.6 6.7
Total Non-Current Assets 3061.9 3070.1
TOTAL ASSETS 6401.0 6277.7
CURRENT LIABILITIES
Trade and other payables 700.8 631.4
Interest-bearing liabilities (fin) 3.2 5.6
Current tax liabilities 143.9 114.6
Provisions 84.3 90.1
Deferred gov't grants 2.1 2.3
Derivative financial instruments (fin) 1.8 1.3
Total Current liabilities 936.1 845.3
NON-CURRENT LIABILITIES
Share based payments (fin) 17.2 19.4
Interest-bearing liabilities (fin) 2277.7 1884.7
Deferred tax liabilities (nonOP) 138.2 127.7
Provisions 31.9 36.0
Deferred gov't grants 31.9 40.9
Retirement benefit liabilities (nonOP) 221.1 161.7
Total Non-Current liabilities 2718 2770.4
TOTAL LIABILITIES 3654.1 3115.7
2 Invested capital turnover: Illustrated example based on CSL FY 2015
Beginning of year Operating Working Capital = operating current assets – operating current liabilities
= (608.7+953.4+1644.5) – (631.4+90.1+2.3) = US$ 2482.8m
1st component of ICT: Operating working capital turnover = _`abc dbebfgbhibd`jkfl mn = opoq.stpqt.q = 2.20
11
1.1.2 Fundamental drivers of ROIC
Consolidated Balance Sheet 2015 2014
CURRENT ASSETS
Cash and cash equivalents 556.8 608.7
Trade and other receivables 1003.7 953.4
Inventories 1755.6 1644.5
Current tax assets 20.4 0.7
Other financial assets (fin) 2.6 0.3
Total Current Assets 3339.1 3207.6
NON-CURRENT ASSETS
Other receivables 11.2 8.2
Other financial assets (fin) 0.5 1.0
PP&E 1841.3 1831.0
Deferred tax assets (nonOP) 274.4 299.1
Intangible assets (nonOP) 926.9 924.1
Retirement benefit assets (nonOP) 7.6 6.7
Total Non-Current Assets 3061.9 3070.1
TOTAL ASSETS 6401.0 6277.7
2 Invested capital turnover: Illustrated example based on CSL FY 2015
Beginning of year fixed assets = PP&E
= US$ 1831.0m
2nd component of ICT: Fixed asset turnover = _`abc dbebfgbukvbw `ccbjc = opoq.sxqyx.z = 3.01
12
1.1.2 Fundamental drivers of ROIC
Consolidated Balance Sheet 2015 2014
CURRENT ASSETS
Cash and cash equivalents 556.8 608.7
Trade and other receivables 1003.7 953.4
Inventories 1755.6 1644.5
Current tax assets 20.4 0.7
Other financial assets (fin) 2.6 0.3
Total Current Assets 3339.1 3207.6
NON-CURRENT ASSETS
Other receivables 11.2 8.2
Other financial assets (fin) 0.5 1.0
PP&E 1841.3 1831.0
Deferred tax assets (nonOP) 274.4 299.1
Intangible assets (nonOP) 926.9 924.1
Retirement benefit assets (nonOP) 7.6 6.7
Total Non-Current Assets 3061.9 3070.1
TOTAL ASSETS 6401.0 6277.7
CURRENT LIABILITIES
Trade and other payables 700.8 631.4
Interest-bearing liabilities (fin) 3.2 5.6
Current tax liabilities 143.9 114.6
Provisions 84.3 90.1
Deferred gov't grants 2.1 2.3
Derivative financial instruments (fin) 1.8 1.3
Total Current liabilities 936.1 845.3
NON-CURRENT LIABILITIES
Share based payments (fin) 17.2 19.4
Interest-bearing liabilities (fin) 2277.7 1884.7
Deferred tax liabilities (nonOP) 138.2 127.7
Provisions 31.9 36.0
Deferred gov't grants 31.9 40.9
Retirement benefit liabilities (nonOP) 221.1 161.7
Total Non-Current liabilities 2718 2770.4
TOTAL LIABILITIES 3654.1 3115.7
2 Invested capital turnover: Illustrated example based on CSL FY 2015
Beginning of year Net other LT-asset = Other LT assets – Other LT liabilities + research asset1 – OL debt2
= 8.2 – (36.0 + 40.9) + 2155.3 – 325 = US$1761.6m
3rd component of ICT: Net other LT-asset turnover = _`abc dbebfgb{bj |(}"~ E,''"( = opoq.sxsx.s = 3.10
1. Refer to Appendix 3 for measurement of research asset in the amount of US$2155.3m
2. Refer to Appendix 1 for estimation of the OL debt in the amount of US$325m
13
Appendix 3: Research asset or capitalised R&D expenses of CSL for FY 2014
Time FYE R&D
expense
Unamortised Portion
Fraction US$m
T = 0 2014 466 1 466 × 1 = 466
-1 2013 427 0.933 427 × 0.933 = 399
-2 2012 370 0.867 … 321
-3 2011 323 0.800 258
-4 2010 278 0.733 204
-5 2009 226 0.667 151
-6 2008 202 0.600 121
-7 2007 150 0.533 80
-8 2006 120 0.467 56
-9 2005 110 0.400 44
-10 2004 72 0.333 24
-11 2003 54 0.267 14
-12 2002 49 0.200 10
-13 2001 44 0.133 6
-14 2000 28 0.067 2
-15 1999 26 0 0
Total RA = 2155.3
Assume life of R&D expenses = 15 years
T = 0 CSL spent US$466m on R&D in FY2014. This is like paying
for a brand new asset. Therefore
• The whole amount 466 * 1 is capitalised.
T = -1 CSL spent US$427m on R&D in FY2013. By the end of
FY2014, the asset would be 1 year old. Therefore
• ⁄$ $% of the amount would have been depreciated.
• The remaining fraction 1 - ⁄$ $% = 0.933 or residual
amount = 427 * 0.933 = 399 would be carried forward to
FY2014 as research asset.
etc for T = -2 to T = -14
T = -15 CSL spent US$26m on R&D in FY1999. By the end of
FY2014, the asset would be 15 year old. Therefore
• ⁄$% $% of the amount would have been depreciated.
• The remaining fraction 1 - ⁄$% $% = 0 or no residual value
would be carried forward to FY2014 as research asset.
Value of research asset at 2014 FYE or beginning of FY2015
= US$2155.3m
14
1.1.2 Fundamental drivers of ROIC
3 Operating cash tax rate = operating cash tax
Operating cash tax rate = 372.91962.2 = 19%
Operating cash tax in theory
Operating cash tax in practice
= reported tax + interest tax shield –
tax paid on nonoperating income
= reported tax + interest tax shield
= reported tax + Net interest expense × Corporate tax rate
Income Statement: CSL Annual Report 2015
Continuing operations Notes US$m
Sales revenue 2 5,458.6
Cost of sales (2,605.9)
Gross profit 2,852.7
Other revenue 2 169.4
R&D expenses 6 (462.7)
Selling and marketing exp (498.3)
General & admin exp (287.5)
Finance costs 2 (59.6)
Profit before income tax exp 1,714.0
Income tax expense 3 (335.0)
Net profit for the period 1,379.0
= 335 + 59.6 × 0.3 = 352.9
ROIC
1.
Operating
margin
3.
Operating
cash tax
rate
2.
Invested
capital
turnover
15
1. Profitability: 1.2 A qualitative analysis of the firm’s competitive position
1.Examine the firm’s ability to
1. Charge a price
premium
2. Manage production
cost
• Innovative products
• Quality products
• Brand awareness
• Customer lock-in
• Unique resources
• Economies of scale
3. Use capital
efficiently
• Scalable and replicable
product/process
16
1. Profitability: 1.2 A qualitative analysis of the firm’s
competitive position
2 Examine the firm’s strategies in response to the structure of the industry
Think the IT industry. Defense & offense
is to focus on innovative and quality
products, scalable product/process,
and/or customer lock-in
Think the automobile
industry. Strategies tend to
focus on quality, brand
awareness, economies of
scale, and scalable
product/process
Think agriculture business.
With relatively weak
bargaining power over
supermarket giants,
focus is on unique
resources & scalable
process
Think airlines, with relatively
weak bargaining power over
airports, they need to focus
on fuel costs, economies of
scale, innovation and
customer lock-in
Degree of rivalry among
competitors: Think airports
with monopoly or oligopoly
powers, they can charge
abnormal rents on users of
their premises and
products/services
In summary, these
forces
i. shape the
strategies of firms
in the same
industry; and
ii. explain the
variation in ROIC
among different
industries
Porter’s
Five
Forces
Threat of
new entry
Bargaining
power of
buyers
Bargaining
power of
suppliers
Pressure
from
substitute
products
Degree of
rivalry
among
competitors
17
1. Profitability: 1.2 A qualitative analysis of the firm’s competitive position
3 Examine the firm’s ability to sustain ROIC
Sustainable
ROIC
Length of
product
life cycle
Persistence
of
competitive
advantage
Potential
for product
renewal
In summary, when you write up the business
overview of a firm, you need to
i. Identify the strategies in place and any
transformational strategies to be implemented
ii. Understand their intention - To improve price
premium, manage cost, and/or productivity
(more efficient use of capital)?
iii. Evaluate their appropriateness - in light of
industry structure & impact on sustaining ROIC
E.g., it will be a waste of capital for WOW to devise
strategies to build a price premium over Coles
18
19Infographic designed by the PVCE
team of educational developers
2. Reinvestment: Changes in invested capital
Are the ratios
1 Acceptable? Check if the company, with positive FCF and a low dividend payout and
reinvestment rate is paying down debt and/or building excessive cash.
2 Sustainable? Check if the company has a high dividend payout and reinvestment rate > 1.
Retention ratio
• 1 - ).#.)"$)' $"( -~.( or (1 − ) Reinvestment rate• $#"'(") ,-.(,/BCD E $#"'(") ,-.(,/BB
20
3. Debt management
3.1 Debt to equity ratio to evaluate a firm’s long-term capital structure
Debt to equity = !"#$%& (")*% +, -%.&!"#$%& (")*% +, /+!!+0 %1*2&3
Q1 Should we base the ratio on
A. End of year market values;
B. Beginning of year market values; or
C. The average of the above?
Q2 The level of debt of a company is dependent on its ability to
1. raise,
2. use and
3. service debt.
Use these considerations to discuss and explain why firms in the utilities and financial
sectors can afford higher a D/E ratio than the biotech and high-tech startups which
typically have no or little debt.
21
3. Debt management
3.2 Interest coverage ratio to evaluate a firm’s ability to service debt
EBIT interest coverage ratio
= .$("~"'( "-"$'"
• Interest expense is associated with loans and borrowings and
OL liabilities (interest component of OL rental payment)
• Measures a firm’s ability to pay interest using operating
profit from core operations without cutting capital
expenditure intended to replace depreciating equipment
22
23Infographic designed by the PVCE
team of educational developers
Quiz 2
• Full Mark: 6%
• Syllabus: Weeks 4-8 (FCFM, FCFV, RIV, FRA)
• Number of questions: 8, with varying marks
• Type of questions: MCQs & Fill in the blank
• MCQs: Choose the best answers
• Time limit: 20 minutes (in-class)
• Format: Closed Book, Moodle Quiz
24
School of Banking and Finance
Course:
FINS3641:
Security Analysis and Valuation
Lecture Topic:
Financial Ratio Analysis (FRA)
To evaluate the past and predict the future
Lecturer:
Samuel Leung
Residual Income Valuation (RIV)
1. Know the difference between accounting profit and economic profit
1. Accounting profit
• Guided by ACCT principles and standards
• Bottom line of income statement which is
sales less operating, finance and tax
expenses
2. Economic profit
• Guided by opportunity cost (OC) concept
• Is sales less operating costs, tax expense
and charges for the use of debt and equity
capital based on missed opportunities
2. Know the measurement of residual income &
corresponding valuation model
1. Definition: RI = net profit – OC of equity
expected by the shareholders
2. Measurement: ! = ! −"×!#$ ! − " ×!#$
3. Model: % = % + ∑!&$' ()!# *" × -!#$$. *" ! or % + ∑!&$' /01!# *" ×-!#$$. *" !
4. Strength: An appealing model; …; Readily
available accounting data
Weakness: Aggressive ACCT practices; …;
Non-zero OCI items
3. Know the process of residual
income valuation RIV
1. Know when to use RIV
2. Conduct test to be assured of honourable
accounting practices
3. Adjust net profit for non-recurring income
statement items and OCI items that are
materially different from zero
4. Estimate residual income
5. Implement different residual income
valuation models
1
2Infographic designed by the PVCE
team of educational developers
1. Profitability: 1.1 ROIC - A quant-based measure
1.1.1 Definition of return on invested capital: ROICt = !"#$%&!'()*+,*- /012,03!"#
Net operating profit
(NOP)
Less adjusted tax
(LAT)
Profit from core operations
before
1. Interest expense
2. Tax expense
i.e. EBIT
Tax reported on income statement is based
on earnings inclusive of income from non-
operating assets and after interest expense
To compute adjusted tax or income tax
related to core operations
1. Lower reported tax by the amount of
tax paid on non-operating income
2. Raise reported tax by the amount of tax
savings from interest expense
i.e. Operating cash tax
Invested capital
Cumulative amount of
investments in fixed
operating assets and
operating working capital
3
1. Profitability 1.1 ROIC - A quant-based measure
1.1.2 Fundamental drivers of ROIC
ROIC = !"#$%&2()*+,*- 4012,03
= 56'& 781*90,2(: 40+; ,0< 2()*+,*- 4012,03
= 56'& 756'& ×81*90,2(: 40+; ,0< 90,* 2()*+,*- 4012,03
= 56'& × (? 7 81*90,2(: 40+; ,0< 90,*) 2()*+,*- 4012,03
= 56'&2()*+,*- 4012,03 × 1 − ℎ
= 56'&9*)*(A* × 9*)*(A*2()*+,*- 4012,03× 1 − ℎ
Return on
invested
capital
1.
Operating
margin
3.
Operating
cash tax
rate
2. Invested
capital
turnover
4
1.1.2 Fundamental drivers of ROIC
1 Operating margin: Measurement of EBIT
Accounting-wise, EBIT = Sales – COGS – SG&A expenses – depn of PP&E
In practice:
EBIT = Sales
– [COGS – restructuring charges]
– [SG&A expenses – interest component of OL rental payment – expenses related to pensions]
– Depn of research asset
COGS SG&A expenses
Often includes
restructuring
charges
Often include
1. Operating lease (OL) rental payment (pre-AASB 16)
2. Expenses related to pensions
3. Amortn expense
4. Depn expense related to PP&E
R&D expenditure
Is often written off in the year
of occurrence, but R&D
expenses are intended to
generate future benefits in the
same fashion as PP&E
5
Notes to the Financial Statements
Note 2: Revenue and expenses, p 82
Depreciation of fixed assets 156.2
Amortisation of intangibles 25.1
Rental expenses relating to OL 40.7
Employee benefits expense: salaries & wages, …, defined benefit & contribution plans 1247.6
Note 5: People Costs
Defined benefit plans 26.7
Defined contribution plans 25.5
EBIT = Sales
– [COGS – restructuring charges]
– [SG&A expenses – interest component of OL rental payment
– expenses related to pensions ]
– depn of research asset
1.1.2 Fundamental drivers of ROIC
Income Statement: CSL Annual Report 2015
Continuing operations Notes US$m
Sales revenue 2 5,458.6
Cost of sales (2,605.9)
Gross profit 2,852.7
Other revenue 2 169.4
R&D expenses 6 (462.7)
Selling and marketing exp (498.3)
General & admin exp (287.5)
Finance costs 2 (59.6)
Profit before income tax exp 1,714.0
Income tax expense 3 (335.0)
Net profit for the period 1,379.0
1 Operating margin: Illustrated example based on CSL FY2015
1. Refer to Appendix 1 for estimation of the interest component of OL rental payment in the amount of US$13m
2. Refer to Appendix 2 for estimation of depn of capitalized research asset in the amount of US$195m
6
1.1.2 Fundamental drivers of ROIC
1 Operating margin: Illustrated example based on CSL FY2015
7
COGS 2,605.9
Less: Restructuring charges -
COGS, net of restructuring charges 2,605.9
Selling and marketing expenses (S&M) 498.3
General and administrative expenses (G&A) 287.5
SG&A 785.8
Less: Interest component of OL rental payment 13.0
Less: Defined benefit plans 26.7
Less: Defined contribution plans 25.5
SG&A, adjusted 720.6
Sales 5,458.6
Less: COGS, net of restructuring charges 2,605.9
Less: SG&A, adjusted 720.6
Less: Depreciation of R&A assets 195.0
EBIT 1,937.1
EBIT 1,937.1
Sales 5,458.6
Operating margin 35.5%
Note: R&D
expenses are NOT
deducted
Appendix 1: Implicit annual interest expense for FY 2015 related to
operating lease debt at the beginning of the FY 2015 or end of FY2014
Schedule of operating lease commitments
Timing Amount US$m Years from 2014
2015 39.8 1
2016 30.75 2
2017 30.75 3
2018 30.75 4
2019 30.75 5
2020 32.425 6
2021 32.425 7
2022 32.425 8
2023 32.425 9
2024 32.425 10
2025 32.425 11
2026 32.425 12
2027 32.425 13
Total 422.2
AR 2014; Note 13 OL commitments, p 121
Not later than one year 39.8
Later than 1 but not later than 5 yrs 123.0
Later than five years 259.4
Total 422.2
A discount rate of 4% is assumed and
applied to future lease commitments
Given the value of the operating lease
debt of US$ 325.0m at the beginning of
FY 2015 and the assumed cost of debt
of 4%, implicit interest charge related
to operating lease rental expense for
FY2015 is US$ 13.0m
FY discount rate PV US$m
4% 38.3
4% 28.4
4% 27.3
4% 26.3
4% 25.3
4% 25.6
4% 24.6
4% 23.7
4% 22.8
4% 21.9
4% 21.1
4% 20.3
4% 19.5
325.0
8
Appendix 2: Depn expense related to capitalised R&D expenses for FY 2015
Assume life of R&D expenses = 15 years
T = 0: CSL spent US$463m on R&D in FY2015. This is like
paying for a brand new asset. Therefore
• The whole amount 463 * 1 is capitalised.
• No depn is charged against this R&D asset.
T = -1 CSL spent US$466m on R&D in FY2014. By the end of
FY2015, the asset would be 1 year old. Therefore
• ⁄$ $% of the amount would have been depreciated.
• The remaining fraction 1 - ⁄$ $% = 0.933 or residual
amount = 466 * 0.933 = 435 would be carried forward
to FY2015 as research asset.
• ⁄$ $% of the original amount would be depreciated in
FY2015 due to straight line depreciation.
T = -2 to -14 etc
T = -15 CSL spent US$28m on R&D in FY2000. By the end of
FY2015, the asset would be 15 year old. Therefore
• ⁄$% $% of the amount would have been depreciated.
• The remaining fraction 1 - ⁄$% $% = 0 or no residual value
would be carried forward to FY2015 as research asset.
• The last ⁄$ $% of the original amount would be depreciated
in FY2015
Time FYE
R&D
expense
Unamortised Portion
Fraction US$m
Depn exp for FY
2015
0 2015 463 1 463 n/a
-1 2014 466 0.933 435 = 466/15 = 31
-2 2013 427 0.867 370 = 427/15 = 28
-3 2012 370 0.800 296 … 25
-4 2011 323 0.733 237 22
-5 2010 278 0.667 185 19
-6 2009 226 0.600 136 15
-7 2008 202 0.533 108 13
-8 2007 150 0.467 70 10
-9 2006 120 0.400 48 8
-10 2005 110 0.333 37 7
-11 2004 72 0.267 19 5
-12 2003 54 0.200 11 4
-13 2002 49 0.133 7 3
-14 2001 44 0.067 3 3
Total
-15 2000 28 0.000 0 = 28/15= 2
RA = 2424 195
9
1.1.2 Fundamental drivers of ROIC
2 Invested capital turnover: Components of ICT
ICT = "#"$%"$#"'(") +,-.(,/
= "#"$%" > > E
To improve ICT, a firm may improve the turnover of its
Operating working capital Fixed assets
Net other long-term asset ℎ
ROIC
1.
Operating
margin
3.
Operating
cash tax
rate
2. Invested
capital
turnover
10
1.1.2 Fundamental drivers of ROIC
Consolidated Balance Sheet 2015 2014
CURRENT ASSETS
Cash and cash equivalents 556.8 608.7
Trade and other receivables 1003.7 953.4
Inventories 1755.6 1644.5
Current tax assets 20.4 0.7
Other financial assets (fin) 2.6 0.3
Total Current Assets 3339.1 3207.6
NON-CURRENT ASSETS
Other receivables 11.2 8.2
Other financial assets (fin) 0.5 1.0
PP&E 1841.3 1831.0
Deferred tax assets (nonOP) 274.4 299.1
Intangible assets (nonOP) 926.9 924.1
Retirement benefit assets (nonOP) 7.6 6.7
Total Non-Current Assets 3061.9 3070.1
TOTAL ASSETS 6401.0 6277.7
CURRENT LIABILITIES
Trade and other payables 700.8 631.4
Interest-bearing liabilities (fin) 3.2 5.6
Current tax liabilities 143.9 114.6
Provisions 84.3 90.1
Deferred gov't grants 2.1 2.3
Derivative financial instruments (fin) 1.8 1.3
Total Current liabilities 936.1 845.3
NON-CURRENT LIABILITIES
Share based payments (fin) 17.2 19.4
Interest-bearing liabilities (fin) 2277.7 1884.7
Deferred tax liabilities (nonOP) 138.2 127.7
Provisions 31.9 36.0
Deferred gov't grants 31.9 40.9
Retirement benefit liabilities (nonOP) 221.1 161.7
Total Non-Current liabilities 2718 2770.4
TOTAL LIABILITIES 3654.1 3115.7
2 Invested capital turnover: Illustrated example based on CSL FY 2015
Beginning of year Operating Working Capital = operating current assets – operating current liabilities
= (608.7+953.4+1644.5) – (631.4+90.1+2.3) = US$ 2482.8m
1st component of ICT: Operating working capital turnover = _`abc dbebfgbhibd`jkfl mn = opoq.stpqt.q = 2.20
11
1.1.2 Fundamental drivers of ROIC
Consolidated Balance Sheet 2015 2014
CURRENT ASSETS
Cash and cash equivalents 556.8 608.7
Trade and other receivables 1003.7 953.4
Inventories 1755.6 1644.5
Current tax assets 20.4 0.7
Other financial assets (fin) 2.6 0.3
Total Current Assets 3339.1 3207.6
NON-CURRENT ASSETS
Other receivables 11.2 8.2
Other financial assets (fin) 0.5 1.0
PP&E 1841.3 1831.0
Deferred tax assets (nonOP) 274.4 299.1
Intangible assets (nonOP) 926.9 924.1
Retirement benefit assets (nonOP) 7.6 6.7
Total Non-Current Assets 3061.9 3070.1
TOTAL ASSETS 6401.0 6277.7
2 Invested capital turnover: Illustrated example based on CSL FY 2015
Beginning of year fixed assets = PP&E
= US$ 1831.0m
2nd component of ICT: Fixed asset turnover = _`abc dbebfgbukvbw `ccbjc = opoq.sxqyx.z = 3.01
12
1.1.2 Fundamental drivers of ROIC
Consolidated Balance Sheet 2015 2014
CURRENT ASSETS
Cash and cash equivalents 556.8 608.7
Trade and other receivables 1003.7 953.4
Inventories 1755.6 1644.5
Current tax assets 20.4 0.7
Other financial assets (fin) 2.6 0.3
Total Current Assets 3339.1 3207.6
NON-CURRENT ASSETS
Other receivables 11.2 8.2
Other financial assets (fin) 0.5 1.0
PP&E 1841.3 1831.0
Deferred tax assets (nonOP) 274.4 299.1
Intangible assets (nonOP) 926.9 924.1
Retirement benefit assets (nonOP) 7.6 6.7
Total Non-Current Assets 3061.9 3070.1
TOTAL ASSETS 6401.0 6277.7
CURRENT LIABILITIES
Trade and other payables 700.8 631.4
Interest-bearing liabilities (fin) 3.2 5.6
Current tax liabilities 143.9 114.6
Provisions 84.3 90.1
Deferred gov't grants 2.1 2.3
Derivative financial instruments (fin) 1.8 1.3
Total Current liabilities 936.1 845.3
NON-CURRENT LIABILITIES
Share based payments (fin) 17.2 19.4
Interest-bearing liabilities (fin) 2277.7 1884.7
Deferred tax liabilities (nonOP) 138.2 127.7
Provisions 31.9 36.0
Deferred gov't grants 31.9 40.9
Retirement benefit liabilities (nonOP) 221.1 161.7
Total Non-Current liabilities 2718 2770.4
TOTAL LIABILITIES 3654.1 3115.7
2 Invested capital turnover: Illustrated example based on CSL FY 2015
Beginning of year Net other LT-asset = Other LT assets – Other LT liabilities + research asset1 – OL debt2
= 8.2 – (36.0 + 40.9) + 2155.3 – 325 = US$1761.6m
3rd component of ICT: Net other LT-asset turnover = _`abc dbebfgb{bj |(}"~ E,''"( = opoq.sxsx.s = 3.10
1. Refer to Appendix 3 for measurement of research asset in the amount of US$2155.3m
2. Refer to Appendix 1 for estimation of the OL debt in the amount of US$325m
13
Appendix 3: Research asset or capitalised R&D expenses of CSL for FY 2014
Time FYE R&D
expense
Unamortised Portion
Fraction US$m
T = 0 2014 466 1 466 × 1 = 466
-1 2013 427 0.933 427 × 0.933 = 399
-2 2012 370 0.867 … 321
-3 2011 323 0.800 258
-4 2010 278 0.733 204
-5 2009 226 0.667 151
-6 2008 202 0.600 121
-7 2007 150 0.533 80
-8 2006 120 0.467 56
-9 2005 110 0.400 44
-10 2004 72 0.333 24
-11 2003 54 0.267 14
-12 2002 49 0.200 10
-13 2001 44 0.133 6
-14 2000 28 0.067 2
-15 1999 26 0 0
Total RA = 2155.3
Assume life of R&D expenses = 15 years
T = 0 CSL spent US$466m on R&D in FY2014. This is like paying
for a brand new asset. Therefore
• The whole amount 466 * 1 is capitalised.
T = -1 CSL spent US$427m on R&D in FY2013. By the end of
FY2014, the asset would be 1 year old. Therefore
• ⁄$ $% of the amount would have been depreciated.
• The remaining fraction 1 - ⁄$ $% = 0.933 or residual
amount = 427 * 0.933 = 399 would be carried forward to
FY2014 as research asset.
etc for T = -2 to T = -14
T = -15 CSL spent US$26m on R&D in FY1999. By the end of
FY2014, the asset would be 15 year old. Therefore
• ⁄$% $% of the amount would have been depreciated.
• The remaining fraction 1 - ⁄$% $% = 0 or no residual value
would be carried forward to FY2014 as research asset.
Value of research asset at 2014 FYE or beginning of FY2015
= US$2155.3m
14
1.1.2 Fundamental drivers of ROIC
3 Operating cash tax rate = operating cash tax
Operating cash tax rate = 372.91962.2 = 19%
Operating cash tax in theory
Operating cash tax in practice
= reported tax + interest tax shield –
tax paid on nonoperating income
= reported tax + interest tax shield
= reported tax + Net interest expense × Corporate tax rate
Income Statement: CSL Annual Report 2015
Continuing operations Notes US$m
Sales revenue 2 5,458.6
Cost of sales (2,605.9)
Gross profit 2,852.7
Other revenue 2 169.4
R&D expenses 6 (462.7)
Selling and marketing exp (498.3)
General & admin exp (287.5)
Finance costs 2 (59.6)
Profit before income tax exp 1,714.0
Income tax expense 3 (335.0)
Net profit for the period 1,379.0
= 335 + 59.6 × 0.3 = 352.9
ROIC
1.
Operating
margin
3.
Operating
cash tax
rate
2.
Invested
capital
turnover
15
1. Profitability: 1.2 A qualitative analysis of the firm’s competitive position
1.Examine the firm’s ability to
1. Charge a price
premium
2. Manage production
cost
• Innovative products
• Quality products
• Brand awareness
• Customer lock-in
• Unique resources
• Economies of scale
3. Use capital
efficiently
• Scalable and replicable
product/process
16
1. Profitability: 1.2 A qualitative analysis of the firm’s
competitive position
2 Examine the firm’s strategies in response to the structure of the industry
Think the IT industry. Defense & offense
is to focus on innovative and quality
products, scalable product/process,
and/or customer lock-in
Think the automobile
industry. Strategies tend to
focus on quality, brand
awareness, economies of
scale, and scalable
product/process
Think agriculture business.
With relatively weak
bargaining power over
supermarket giants,
focus is on unique
resources & scalable
process
Think airlines, with relatively
weak bargaining power over
airports, they need to focus
on fuel costs, economies of
scale, innovation and
customer lock-in
Degree of rivalry among
competitors: Think airports
with monopoly or oligopoly
powers, they can charge
abnormal rents on users of
their premises and
products/services
In summary, these
forces
i. shape the
strategies of firms
in the same
industry; and
ii. explain the
variation in ROIC
among different
industries
Porter’s
Five
Forces
Threat of
new entry
Bargaining
power of
buyers
Bargaining
power of
suppliers
Pressure
from
substitute
products
Degree of
rivalry
among
competitors
17
1. Profitability: 1.2 A qualitative analysis of the firm’s competitive position
3 Examine the firm’s ability to sustain ROIC
Sustainable
ROIC
Length of
product
life cycle
Persistence
of
competitive
advantage
Potential
for product
renewal
In summary, when you write up the business
overview of a firm, you need to
i. Identify the strategies in place and any
transformational strategies to be implemented
ii. Understand their intention - To improve price
premium, manage cost, and/or productivity
(more efficient use of capital)?
iii. Evaluate their appropriateness - in light of
industry structure & impact on sustaining ROIC
E.g., it will be a waste of capital for WOW to devise
strategies to build a price premium over Coles
18
19Infographic designed by the PVCE
team of educational developers
2. Reinvestment: Changes in invested capital
Are the ratios
1 Acceptable? Check if the company, with positive FCF and a low dividend payout and
reinvestment rate is paying down debt and/or building excessive cash.
2 Sustainable? Check if the company has a high dividend payout and reinvestment rate > 1.
Retention ratio
• 1 - ).#.)"$)' $"( -~.( or (1 − ) Reinvestment rate• $#"'(") ,-.(,/BCD E $#"'(") ,-.(,/BB
20
3. Debt management
3.1 Debt to equity ratio to evaluate a firm’s long-term capital structure
Debt to equity = !"#$%& (")*% +, -%.&!"#$%& (")*% +, /+!!+0 %1*2&3
Q1 Should we base the ratio on
A. End of year market values;
B. Beginning of year market values; or
C. The average of the above?
Q2 The level of debt of a company is dependent on its ability to
1. raise,
2. use and
3. service debt.
Use these considerations to discuss and explain why firms in the utilities and financial
sectors can afford higher a D/E ratio than the biotech and high-tech startups which
typically have no or little debt.
21
3. Debt management
3.2 Interest coverage ratio to evaluate a firm’s ability to service debt
EBIT interest coverage ratio
= .$("~"'( "-"$'"
• Interest expense is associated with loans and borrowings and
OL liabilities (interest component of OL rental payment)
• Measures a firm’s ability to pay interest using operating
profit from core operations without cutting capital
expenditure intended to replace depreciating equipment
22
23Infographic designed by the PVCE
team of educational developers
Quiz 2
• Full Mark: 6%
• Syllabus: Weeks 4-8 (FCFM, FCFV, RIV, FRA)
• Number of questions: 8, with varying marks
• Type of questions: MCQs & Fill in the blank
• MCQs: Choose the best answers
• Time limit: 20 minutes (in-class)
• Format: Closed Book, Moodle Quiz
24
