This document summarizes key points from Live Session #4 of a financial analysis MOOC taught by Marc Bertoneche on March 19th, 2014. It discusses the Boston Medical Instruments business case that students will analyze for their final synthesis. It also covers profitability ratios like ROCE and ROE, the leverage effect formula, and worked examples of calculating ROCE and ROE for BMI from 1996-1998 using information from their income statements. The session concluded with a review of the course forums.
1. LIVE SESSION #4 WEDNESDAY MARCH 19TH 2014
FINANCIAL ANALYSIS MOOC WITH MARC BERTONECHE
INTRODUCTION
2. LIVE SESSION #4 WEDNESDAY MARCH 19TH 2014
FINANCIAL ANALYSIS MOOC WITH MARC BERTONECHE
Attestation of Success to the MOOC
Already more than 400 registrants
Boston Medical Instruments
business case
Synthesis to be performed
Correction by peers
$30 for students, $70 for
professionals
An average grade of 60% is required to obtain the Attestation of
success. The weight is the following: 50% for the Week 1 to 4,
50% for the Week 5 (1 synthesis and 1 quiz)
3. LIVE SESSION #4 WEDNESDAY MARCH 19TH 2014
FINANCIAL ANALYSIS MOOC WITH MARC BERTONECHE
Boston Medical Instruments (BMI) developed, manufactured
and sold scientific medical instruments, needles and catheters
which allowed rapid and less invasive access to a number of
different organs and vessels.
BMI experienced extraordinary growth, fueled by heavy
spending on research and development, necessary to
maintain BMI’s competitive advantage and rapid expansion of
its sales force.
BMI has reached the maximum level of debt ( Short term
debt) which the banker is ready to provide. What should the
company do now?
Week 5 - Boston Medical Instruments
4. LIVE SESSION #4 WEDNESDAY MARCH 19TH 2014
FINANCIAL ANALYSIS MOOC WITH MARC BERTONECHE
What’s a Profitability Ratio?
« A profitability ratio is always computed with some
profit over some capital used »
Net profit
Equity
Example :
Operating profit
sales
What is NOT a profitability ratio :
5. LIVE SESSION #4 WEDNESDAY MARCH 19TH 2014
FINANCIAL ANALYSIS MOOC WITH MARC BERTONECHE
Return On Capital Employed (ROCE)
and Return on Equity (ROE)
Economic profitability is the real business profitability. Financial
profitability can be manipulated
ROCE: Economic
Profitability
Operating profit x ( 1 – tax rate)
Capital employed
ROE: Financial
Profitability
Net profit
Equity
6. LIVE SESSION #4 WEDNESDAY MARCH 19TH 2014
FINANCIAL ANALYSIS MOOC WITH MARC BERTONECHE
The Leverage Effect
Leverage effect explains the breakdown of equity profitability:
The profitability from business operations and the financial
profitability coming from debt
Financial leverage itself doesn’t create any value
Formula :
Leverage effect
ROE = ROCE + [ ( ROCE - i) x D/E ]
7. LIVE SESSION #4 WEDNESDAY MARCH 19TH 2014
FINANCIAL ANALYSIS MOOC WITH MARC BERTONECHE
Fixed
Assets
816
NWC
602
Equity
2 514
Net
Financial
debt
(1 095)
Tax rate : 35.5%
Capital employed = 1 419
Compte de
résultat
Income Statement- 1996 In thousands of Euros
EBIT 1 873
Financial income 1
Financial expense 39
Income before exceptional
items
1 911
Exceptional items -
Income taxes 679
Net profit 1 232
=
1 873 x (1 - 35.5%)
=1 419
85%
=
1 232
=
2 514
49%
ROCE
ROE
8. LIVE SESSION #4 WEDNESDAY MARCH 19TH 2014
FINANCIAL ANALYSIS MOOC WITH MARC BERTONECHE
Fixed
assets
1 738
NWC
2 244
Equity
5 489
NFD
(1 506)
Capital employed = 3 983
Compte de
résultat
Income Statement - 1997 In thousands of Euros
EBIT 2 235
Financial income 24
Financial expense 33
Income before exceptional
items
2 226
Exceptional items 74
Income taxes 712
Net profit 1 440
=
2 235 x (1 – 33.1%)
=
3 983
37.5%
=
1 440
=
5 489
26.2%
Tax rate : 33.1%
ROCE
ROE
9. LIVE SESSION #4 WEDNESDAY MARCH 19TH 2014
FINANCIAL ANALYSIS MOOC WITH MARC BERTONECHE
Fixed
assets
2 408
NWC
7 338
Equity
6 939
NFD
2 807
Capital employed = 9 746
Compte de
résultat
Income Statement - 1998 In thousands of Euros
EBIT 2761
Financial income 87
Financial expense 27
Income before exceptional
items
2701
Exceptional items -
Income taxes 804
Net profit 1897
=
2 761 x (1 – 29.8%)
=9 746
19.1%
=
1 897
=6 939
27.3%
Tax rate : 29.8%
ROCE
ROE
10. LIVE SESSION #4 WEDNESDAY MARCH 19TH 2014
FINANCIAL ANALYSIS MOOC WITH MARC BERTONECHE
1996 1997 1998
Operating margin after tax (1)
X
Turnover (2)
=
ROCE
+
Leverage effect
=
ROE
16.0 %
5.3
85.0 %
-36.0 %
49.0 %
15.0 %
2.5
37.5 %
-11.3 %
26.2 %
11.0 %
1.8
19.9 %
7.4 %
27.3 %
(1) Operating income x (1 – tax rate) Sales
(2) Sales Capital employed
11. LIVE SESSION #4 WEDNESDAY MARCH 19TH 2014
FINANCIAL ANALYSIS MOOC WITH MARC BERTONECHE
Forums Review
12. LIVE SESSION #4 WEDNESDAY MARCH 19TH 2014
FINANCIAL ANALYSIS MOOC WITH MARC BERTONECHE
QUESTIONS
13. LIVE SESSION #4 WEDNESDAY MARCH 19TH 2014
FINANCIAL ANALYSIS MOOC WITH MARC BERTONECHE
CONCLUSION