# Prepare a vertical and horizontal analysis of the income statement and balance sheet.

1. Compute ROE for all three years reported on the income statement. (Hint: Do your companies report non-controlling interest on the income statement and balance sheet? If so, make certain to use income available to the controlling interest (NICI) in the numerator and equity of the controlling interest (CI) in the denominator. To compute ROE for three years, we must determine average stockholders’ equity for three years, which means we need four balance sheet amounts. Because the balance sheets of each company will report only two years, we must collect prior years’ financial statements.
2. Compute RNOA and its two components (NOPM and NOAT) for all three years reported on the income statement. We must use balance sheet numbers for four years to obtain three averages of net operating assets. Examine the income statements and balance sheets to determine the operating and non operating items. (Hint: Use an online source to understand any line items not described in the textbook. Use cell references in the spreadsheet to compute NOPAT and NOA and the various ratios.)
3. Compare ROE and RNOA and identify differences over time and between the companies. Evaluate the companies’ returns and answer questions such as the following: Which company is more profitable? How do the operating and non-operating portions of ROE compare? Compare the ROE and RNOA with the graph on page 3-25. If the ratios for the companies under analysis differ from the graph, is there an explanation? Is the net operating profit margin similar for the two companies? Given that they are roughly in the same industry, major differences should prompt further exploration. Are the companies’ net operating asset turnover ratios similar or markedly different? Calculate and compare the cash conversion cycle for each year.
4. Determine FLEV and Spread and the non-controlling interest ratio (if applicable). Show that: ROE + [RNOA 1 (FLEV – Spread)] * Non-controlling interest ratio. Compare the components of the equation for each company over time and follow up on any differences
5. Prepare a vertical and horizontal analysis of the income statement and balance sheet. Compare the ratios for the companies under analysis and identify differences over time and between companies.
Here is a list of the formulas for OA3, will make things a bit easier.
Net operating profit after tax NOPAT NOPBT-[tax expense + (Pretax net non-op expense * tax rate)]
Net operating profit margin NOPM NOPAT/Sales
Net operating asset turnover NOAT Sales/Avg NOA
Return on operating assets RNOA [also for Ch 4] NOPAT/Avg NOA
Return on equity ROE [also for Ch 4] NI/Avg equity
duPont profit margin PM (App3b) NI/Sales
duPont asset turnover AT (App3b) Sales/Avg TA
duPont financial leverage FL (App3b) Avg TA/Avg SE
duPont ROE (App3b) Must be same as ROE above: PM * AT * FL.
ROA (App3b) NI/Avg TA
Current ratio [also for Ch 4} CA / CL
Quick ratio [also for Ch 4] (Cash + MktSec + Accts rec, net) / CL
Liabilities/Equity [also for Ch 4] TL / TSEq
Times interest earned [also for Ch 4] (EBT + Interest expense) / Interest expense

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