 | The Analysis of Profitability
After reading this chapter you should understand:
- How ratios aggregate to explain return on common
equity (ROCE).
- How financial leverage affects ROCE.
- How operating liability leverage affects ROCE.
- The difference between return on net operating assets
(RNOA) and return on assets (ROA).
- How profit margins, asset turnovers, and their composite
ratios drive RNOA.
- How borrowing costs are analyzed.
- How profitability analysis can be used to ask penetrating
questions regarding the firm's activities.
After reading this chapter you should be able to:
- Calculate ratios that drive ROCE.
- Demonstrate how ratios combine to yield the ROCE.
- Perform a complete profitability analysis on reformulated
financial statements.
- Prepare a spreadsheet program based on the design
in this chapter. See the BYOAP feature on the text's
Web site.
- Answer "what-if" questions about a firm using the
analysis in this chapter.
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