Chapter 4 Profitability Analysis

Disaggregating ROCE

• ROCE can be further disintegrated into:
• ROCE =

• Chapter: 04

• Leverage refers to use of debt to increase return to common stockholders
• ROCE > ROA
• When ROA > Cost of debt and Preferred stock financing.

Interpreting Financial Statement Ratios

• Comparing with Earlier Periods
• Raise the following questions:
• Has the firm made a significant change in its product, geographic, or customer mix?
• Has the firm made a major acquisition or divestiture?
• Has the firm changed its methods of accounting over time?
• Are there any unusual or nonrecurring amounts that impair a comparable analysis of financial results across?

• Chapter: 04

Interpreting Financial Statement Ratios (Contd.)

• Comparing with Other Firms
• Consider the following:
• Definition of the industry
• Calculation of industry average
• Distribution of ratios around the mean
• Definition of financial statement ratios

• Chapter: 04