Objectives and Game Plan ! Introduction to Ratio Analysis ! Overview of other properties of earnings 15.514 Summer 2003ROE (Dupont) Analysis NI = NI + (int. exp.) X NI X Assets SE Assets NI + (int. exp.) SE Operating Capital Performance Structure “return on assets” “return on “asset sales” turnover” NI + (int. exp.) Sales XSales Assets 15.514 Summer 2003Comparative Analysis: 2000 15.514 Summer 2003Return on Sales vs. Asset Turnover Sales Assets NI + (int. exp.) Sales 15.514 Summer 2003 Each point represents an industryReturn on Sales (positive only) vs. Asset Turnover Sales Assets Each point represents an industry Semiconductors NI + (int. exp.) Sales 15.514 Summer 2003Return on Sales (positive only) vs. Asset Turnover NI + (int. exp.) Sales Sales Assets 14% 8% 2% Return on Assets Semiconductors 15.514 Summer 2003Comparative Analysis: 2000 15.514 Summer 2003Intel over time 15.514 Summer 2003Comparative Analysis 15.514 Summer 2003Microsoft 15.514 Summer 2003Microsoft ! Anything unusual about Microsoft? < 2002 Total Assets $67.646 billion – $38,652 billion was cash or near-cash (57 percent) – Even at 5% that’s going to earn less than $2 billion (MSFT reported $1.76 billion in interest) < What effect does this have on ROA? Other components? < Remove the effects of cash from NI (after-tax) and Assets < Other aspects of MSFT accounting choices - they expense all software development when some could be capitalized. – What accounts does this decision affect? What direction? 15.514 Summer 2003Microsoft 15.514 Summer 2003Percent of firms reporting negative NI 15.514 Summer