- ROIC, and
- Revenue Growth.
The analysis of performance and competitive position begins with an analysis of these key drivers of value.
After having done that analysis, then do an assessment of the financial health of the firm to show whether it can make short-term and long-term investments
It is useful to analyze ROIC with and without goodwill.
= (1- Operating Cash Tax Rate) x (EBITA/Revenues) x (Revenues/Invested Capital)
= (1 - Operating Cash Tax Rate ) x EBITA / Invested Capital
= NOPLAT / Invested Capital
Revenue growth is one of the determinants of cash flows.
Organic revenue growth should be distinguished from growth derived from other factors such as currency effects, acquisitions, or divestitures.
A comprehensive model does a line item analysis, which converts every line in the financial statements into a ratio.
Ratios include common size entries computed in terms of assets or revenues for the balance sheet and income statement, respectively, and also days ratios found by the following general expression:
Days = 365 x (Balance Sheet Item / Revenues)
Other measures provide insights into efficiency relative to other firms
One such expression is a breakdown of labour costs per unit:
Labour Expenses / Units of Output
= (Labour Expenses / Number of Employees) / (Units of Output/Number of Employees)
Power and danger of leverage
The following equation helps illustrate the power and danger of leverage
ROE = ROIC + [ROIC - (1 - T) x kd ] x D/E
T = tax rate
kd = cost of debt
It is important to note how the market debt-to-equity compares to peers in terms of the coverage and the level of risk the firm takes.