Chapter 4 - Using financial statements to analyze value creation. The following will be discussed in this chapter: Determinants of value creation: analyzing return of equity, return on assets (roa), measures of effective sales and expense management, measures of effective assets management, asset turnover ratios, solvency ratios, measures of effective capital structure management,. | Chapter 4 Using Financial Statements to Analyze Value Creation Value Creation Management’s goal is to generate a return on the owners’ investment that exceeds the cost of equity. Return on equity (ROE) is used to make the comparison between an enterprise’s return on investment and the cost of that investment. Return on Net Income Equity Average Shareholders’ Equity This ratio measures the effectiveness at managing capital provided by the shareholders. Return on Equity Return on Net Income + Interest Expense (1-tax rate) Assets Average Total Assets This ratio measures the effectiveness at managing capital provided by all investors (stockholders and creditors). Return on Assets Return on Sales Return on Net Income + Interest Expense (1-tax rate) Sales Net Sales This ratio provides an indication of a company’s ability to generate and market profitable products and control its costs; also called the Profit Margin. Asset Turnover Ratios Asset turnover ratios are . | Chapter 4 Using Financial Statements to Analyze Value Creation Value Creation Management’s goal is to generate a return on the owners’ investment that exceeds the cost of equity. Return on equity (ROE) is used to make the comparison between an enterprise’s return on investment and the cost of that investment. Return on Net Income Equity Average Shareholders’ Equity This ratio measures the effectiveness at managing capital provided by the shareholders. Return on Equity Return on Net Income + Interest Expense (1-tax rate) Assets Average Total Assets This ratio measures the effectiveness at managing capital provided by all investors (stockholders and creditors). Return on Assets Return on Sales Return on Net Income + Interest Expense (1-tax rate) Sales Net Sales This ratio provides an indication of a company’s ability to generate and market profitable products and control its costs; also called the Profit Margin. Asset Turnover Ratios Asset turnover ratios are typically computed for total assets, accounts receivable, inventory, and fixed assets. These ratios measure the speed with which assets move through operations or reflect the number of times during a given period that these specific assets are acquired, used, and replaced. Total Asset Turnover Ratio Total Asset Sales Turnover Average Total Assets This ratio measures the speed with which all assets are used up in operations. Fixed Asset Turnover Ratio Fixed Assets Sales Turnover Average Fixed Assets This ratio measures the speed with which fixed assets are used up. Receivables Turnover Ratio Receivables Net Credit Sales Turnover Average Accounts Receivable This ratio reflects the number of times the trade receivables were recorded, collected, and recorded again during the period. Inventory Turnover Ratio Inventory Cost of Goods Sold Turnover Average Inventory This ratio measures the speed with which inventories move through operations. Accounts Payable Turnover Accounts .
