This week we begin focusing more seriously on actually analyzing financial state
This week we begin focusing more seriously on actually analyzing financial statement information. Yay! In particular, we will use ROE, a significant summary measure for firm performance, as the basis for our analysis scheme. Further, our methodology relies on disaggregating ROE into components. Consider the etymology of the term “analysis.” Originating in the Greek language, it means “unloose,” basically to break up. This should make sense since to analyze is to examine the component parts of something.
So, in meta fashion, let’s analyze our analysis structure. It consists of several important component parts (i.e., operating ROE [RNOA], non-operating ROE, NOPM, NOAT, and deeper level margin and turnover ratios), and the disaggregation into those components is a crucially important component itself. A. Why and how are these component pieces so important to our analysis structure?
B. Does information quality fit into our analysis in this regard?
C. Considering the ROE decomposition focus on operating activities in particular, investors and lenders place significant importance on management’s effectiveness in generating a high return on net operating assets. Is this measure important for management’s analysis of its own performance as well?