Financial Statements and Firm Value 121Exhibit 5.2 Common size financial statements
2000 2001A. Common size balance sheet
(as percentage of total assets)
Total current assets 0.48 0.50
(cash + receivables + inventory)
Gross fixed assets 0.28 0.27
Total borrowings 0.019 0.012
Total current liabilities 0.55 0.52
Total equity 0.42 0.44
B. Common size income statement
(as percentage of total sales)
Sales 1.00 1.00
SG&A 0.10 0.10
Depreciation 0.01 0.01
Interest 0.001 0.00
PAT 0.115 0.138
DuPont Analysis
The ROI is a function of operating profit margin and turnover. By decomposing major ratios, a more meaning-
ful analysis of the underlying business drivers can be made. For instance, the figure representing total assets
can be broken down into its components such as current assets and fixed assets to investigate why these
ratios are what they are:
ROE =
EquityNet income=
EquityAssets
AssetsSales
SalesNet income
××= [Profit margin] × [Asset turnover] × [Financial leverage]ROE can increase if any of these ratios increase. Decomposing ROE into its components throws light on
the behavior of each of the component ratios over a period. As we shall see later, increasing financial leverage
is beneficial only up to a certain extent. Reckless borrowing will destroy shareholder value.
ROE = [ROA + D/E{ROA – i(1 – T)}]where
i= interest rate on debt,
T= tax rate,
D/E= debt–equity ratio, and
ROA = EBIT (1 – T) / Book value of total capital.