財(cái)務(wù)報(bào)表分析 英文文獻(xiàn)

1、外 文 文 獻(xiàn) 年 月 日Financial Statement Analysis of Leverage and How It Informs About Profitability and Price-to-Book RatiosDORON NISSIM, STEPHEN H. PENMANABSTRACTThis paper presents a financial statement analysis that distinguishes leverage that arises in financing activities from leverage that arises in

2、operations. The analysis yields two leveraging equations, one for borrowing to finance operations and one for borrowing in the course of operations. These leveraging equations describe how the two types of leverage affect book rates of return on equity. An empirical analysis shows that the financial

3、 statement analysis explains cross-sectional differences in current and future rates of return as well as price-to-book ratios, which are based on expected rates of return on equity. The paper therefore concludes that balance sheet line items for operating liabilities are priced differently than tho

4、se dealing with financing liabilities. Accordingly, financial statement analysis that distinguishes the two types of liabilities informs on future profitability and aids in the evaluation of appropriate price-to-book ratios.Keywords: financing leverage; operating liability leverage; rate of return o

5、n equity; price-to-book ratioLeverage is traditionally viewed as arising from financing activities: Firms borrow to raise cash for operations. This paper shows that, for the purposes of analyzing profitability and valuing firms, two types of leverage are relevant, one indeed arising from financing a

6、ctivities but another from operating activities. The paper supplies a financial statement analysis of the two types of leverage that explains differences in shareholder profitability and price-to-book ratios.The standard measure of leverage is total liabilities to equity. However, while some liabili

7、tieslike bank loans and bonds issuedare due to financing, other liabilitieslike trade payables, deferred revenues, and pension liabilitiesresult from transactions with suppliers, customers and employees in conducting operations. Financing liabilities are typically traded in well-functioning capital

8、markets where issuers are price takers. In contrast, firms are able to add value in operations because operations involve trading in input and output markets that are less perfect than capital markets. So, with equity valuation in mind, there are a priori reasons for viewing operating liabilities di

9、fferently from liabilities that arise in financing . Our research asks whether a dollar of operating liabilities on the balance sheet is priced differently from a dollar of financing liabilities. As operating and financing liabilities are components of the book value of equity, the question is equiv

10、alent to asking whether price-to-book ratios depend on the composition of book values. The price-to-book ratio is determined by the expected rate of return on the book value so, if components of book value command different price premiums, they must imply different expected rates of return on book v

11、alue. Accordingly, the paper also investigates whether the two types of liabilities are associated with differences in future book rates of return.Standard financial statement analysis distinguishes shareholder profitability that arises from operations from that which arises from borrowing to financ

12、e operations. So, return on assets is distinguished from return on equity, with the difference attributed to leverage. However, in the standard analysis, operating liabilities are not distinguished from financing liabilities. Therefore, to develop the specifications for the empirical analysis, the p

13、aper presents a financial statement analysis that identifies the effects of operating and financing liabilities on rates of return on book valueand so on price-to-book ratioswith explicit leveraging equations that explain when leverage from each type of liability is favorable or unfavorable.The empi

14、rical results in the paper show that financial statement analysis that distinguishes leverage in operations from leverage in financing also distinguishes differences in contemporaneous and future profitability among firms. Leverage from operating liabilities typically levers profitability more than

15、financing leverage and has a higher frequency of favorable effects. Accordingly, for a given total leverage from both sources, firms with higher leverage from operations have higher price-to-book ratios, on average. Additionally, distinction between contractual and estimated operating liabilities ex

16、plains further differences in firms profitability and their price-to-book ratios.Our results are of consequence to an analyst who wishes to forecast earnings and book rates of return to value firms. Those forecastsand valuations derived from themdepend, we show, on the composition of liabilities. Th

17、e financial statement analysis of the paper, supported by the empirical results, shows how to exploit information in the balance sheet for forecasting and valuation.The paper proceeds as follows. Section 1 outlines the financial statements analysis that identifies the two types of leverage and lays

18、out expressions that tie leverage measures to profitability. Section 2 links leverage to equity value and price-to-book ratios. The empirical analysis is in Section 3, with conclusions summarized in Section 4.1 Financial Statement Analysis of LeverageThe following financial statement analysis separa

19、tes the effects of financing liabilities and operating liabilities on the profitability of shareholders equity. The analysis yields explicit leveraging equations from which the specifications for the empirical analysis are developed. Shareholder profitability, return on common equity, is measured as

20、Return on common equity (ROCE) = comprehensive net income common equity (1)Leverage affects both the numerator and denominator of this profitability measure. Appropriate financial statement analysis disentangles the effects of leverage. The analysis below, which elaborates on parts of Nissim and Pen

21、man (2001), begins by identifying components of the balance sheet and income statement that involve operating and financing activities. The profitability due to each activity is then calculated and two types of leverage are introduced to explain both operating and financing profitability and overall

22、 shareholder profitability.1.1 Distinguishing the Profitability of Operations from the Profitability of Financing ActivitiesWith a focus on common equity (so that preferred equity is viewed as a financial liability), the balance sheet equation can be restated as follows:Common equity =operating asse

23、tsfinancial assetsoperating liabilitiesFinancial liabilities (2) The distinction here between operating assets (like trade receivables, inventory and property, plant and equipment) and financial assets (the deposits and marketable securities that absorb excess cash) is made in other contexts. Howeve

24、r, on the liability side, financing liabilities are also distinguished here from operating liabilities. Rather than treating all liabilities as financing debt, only liabilities that raise cash for operationslike bank loans, short-term commercial paper and bondsare classified as such. Other liabiliti

25、essuch as accounts payable, accrued expenses, deferred revenue, restructuring liabilities and pension liabilitiesarise from operations. The distinction is not as simple as current versus long-term liabilities; pension liabilities, for example, are usually long-term, and short-term borrowing is a cur

26、rent liability.Rearranging terms in equation (2),Common equity = (operating assetsoperating liabilities)(financial liabilitiesfinancial assets)Or,Common equity = net operating assetsnet financing debt (3)This equation regroups assets and liabilities into operating and financing activities. Net opera

27、ting assets are operating assets less operating liabilities. So a firm might invest in inventories, but to the extent to which the suppliers of those inventories grant credit, the net investment in inventories is reduced. Firms pay wages, but to the extent to which the payment of wages is deferred i

28、n pension liabilities, the net investment required to run the business is reduced. Net financing debt is financing debt (including preferred stock) minus financial assets. So, a firm may issue bonds to raise cash for operations but may also buy bonds with excess cash from operations. Its net indebte

29、dness is its net position in bonds. Indeed a firm may be a net creditor (with more financial assets than financial liabilities) rather than a net debtor.The income statement can be reformulated to distinguish income that comes from operating and financing activities:Comprehensive net income = operat

30、ing income net financing expense (4)Operating income is produced in operations and net financial expense is incurred in the financing of operations. Interest income on financial assets is netted against interest expense on financial liabilities (including preferred dividends) in net financial expens

31、e. If interest income is greater than interest expense, financing activities produce net financial income rather than net financial expense. Both operating income and net financial expense (or income ) are after tax.3 Equations (3) and (4) produce clean measures of after-tax operating profitability

32、and the borrowing rate:Return on net operating assets (RNOA) = operating income net Net borrowing rate (NBR) = net financing expense net financing RNOA recognizes that profitability must be based on the net assets invested in operations. So firms can increase their operating profitability by convinc

33、ing suppliers, in the course of business, to grant or extend credit terms; credit reduces the investment that shareholders would otherwise have to put in the business. Correspondingly, the net borrowing rate, by excluding non-interest bearing liabilities from the denominator, gives the appropriate b

34、orrowing rate for the financing activities.Note that RNOA differs from the more common return on assets (ROA), usually defined as income before after-tax interest expense to total assets. ROA does not distinguish operating and financing activities appropriately. Unlike ROA, RNOA excludes financial a

35、ssets in the denominator and subtracts operating liabilities. Nissim and Penman (2001) report a median ROA for NYSE and AMEX firms from 19631999 of only 6.8%, but a median RNOA of 10.0%much closer to what one would expect as a return to business operations.1.2 Financial Leverage and its Effect on Sh

36、areholder Profitability From expressions (3) through (6), it is straightforward to demonstrate that ROCE is a weighted average of RNOA and the net borrowing rate, with weights derived from equation (3):ROCE= net operating assets common equity RNOAnet financing debtcommon equity net borrowing rate (7

37、)Additional algebra leads to the following leveraging equation:ROCE = RNOAFLEV ( RNOAnet borrowing rate ) (8)where FLEV, the measure of leverage from financing activities, isFinancing leverage (FLEV) =net financing debt common equity (9)The FLEV measure excludes operating liabilities but includes (a

38、s a net against financing debt) financial assets. If financial assets are greater than financial liabilities, FLEV is negative. The leveraging equation (8) works for negative FLEV (in which case the net borrowing rate is the return on net financial assets).This analysis breaks shareholder profitabil

39、ity, ROCE, down into that which is due to operations and that which is due to financing. Financial leverage levers the ROCE over RNOA, with the leverage effect determined by the amount of financial leverage (FLEV) and the spread between RNOA and the borrowing rate. The spread can be positive (favora

40、ble) or negative (unfavorable).1.3 Operating Liability Leverage and its Effect on Operating ProfitabilityWhile financing debt levers ROCE, operating liabilities lever the profitability of operations, RNOA. RNOA is operating income relative to net operating assets, and net operating assets are operat

41、ing assets minus operating liabilities. So, the more operating liabilities a firm has relative to operating assets, the higher its RNOA, assuming no effect on operating income in the numerator. The intensity of the use of operating liabilities in the investment base is operating liability leverage:O

42、perating liability leverage (OLLEV) =operating liabilities net operating assets (10)Using operating liabilities to lever the rate of return from operations may not come for free, however; there may be a numerator effect on operating income. Suppliers provide what nominally may be interest-free credi

43、t, but presumably charge for that credit with higher prices for the goods and services supplied. This is the reason why operating liabilities are inextricably a part of operations rather than the financing of operations. The amount that suppliers actually charge for this credit is difficult to ident

44、ify. But the market borrowing rate is observable. The amount that suppliers would implicitly charge in prices for the credit at this borrowing rate can be estimated as a benchmark:Market interest on operating liabilities= operating liabilitiesmarket borrowing ratewhere the market borrowing rate, giv

45、en that most credit is short term, can be approximated by the after-tax short-term borrowing rate. This implicit cost is benchmark, for it is the cost that makes suppliers indifferent in supplying credit suppliers are fully compensated if they charge implicit interest at the cost borrowing to supply

46、 the credit. Or, alternatively, the firm buying the goods or services is indifferent between trade credit and financing purchases at the borrowing rate.To analyze the effect of operating liability leverage on operating profitability, we define:Return on operating assets (ROOA) =(operating incomemark

47、et interest on operating liabilities)operating assets (11)The numerator of ROOA adjusts operating income for the full implicit cost of trade credit. If suppliers fully charge the implicit cost of credit, ROOA is the return of operating assets that would be earned had the firm no operating liability

48、leverage. suppliers do not fully charge for the credit, ROOA measures the return fro operations that includes the favorable implicit credit terms from suppliers.Similar to the leveraging equation (8) for ROCE, RNOA can be expressed as:RNOA = ROOA OLLEV (ROOAmarket borrowing rate ) (12)where the borr

49、owing rate is the after-tax short-term interest rate. Given ROOA, the effect of leverage on profitability is determined by the level of operating liability leverage and the spread between ROOA and the short-term after-tax interest rate. Like financing leverage, the effect can be favorable or unfavor

50、able: Firms can reduce their operating profitability through operating liability leverage if their ROOA is less than the market borrowing rate. However, ROOA will also be affected if the implicit borrowing cost on operating liabilities is different from the market borrowing rate.1.4 Total Leverage a

51、nd its Effect on Shareholder ProfitabilityOperating liabilities and net financing debt combine into a total leverage measure:Total leverage (TLEV) = ( net financing debtoperating liabilities)common equityThe borrowing rate for total liabilities is:Total borrowing rate = (net financing expensemarket

52、interest on operating liabilities) net financing debtoperating liabilitiesROCE equals the weighted average of ROOA and the total borrowing rate, where the weights are proportional to the amount of total operating assets and the sum of net financing debt and operating liabilities (with a negative sig

53、n), respectively. So, similar to the leveraging equations (8) and (12):ROCE = ROOA TLEV(ROOA total borrowing rate) (13)In summary, financial statement analysis of operating and financing activities yields three leveraging equations, (8), (12), and (13). These equations are based on fixed accounting

54、relations and are therefore deterministic: They must hold for a given firm at a given point in time. The only requirement in identifying the sources of profitability appropriately is a clean separation between operating and financing components in the financial statements.2 Leverage, Equity Value an

55、d Price-to-Book RatiosThe leverage effects above are described as effects on shareholder profitability. Our interest is not only in the effects on shareholder profitability, ROCE, but also in the effects on shareholder value, which is tied to ROCE in a straightforward way by the residual income valu

56、ation model. As a restatement of the dividend discount model, the residual income model expresses the value of equity at date 0 (P0) as:B is the book value of common shareholders equity, X is comprehensive income to common shareholders, and r is the required return for equity investment. The price p

57、remium over book value is determined by forecasting residual income, Xt rBt-1. Residual income is determined in part by income relative to book value, that is, by the forecasted ROCE. Accordingly, leverage effects on forecasted ROCE (net of effects on the required equity return) affect equity value

58、relative to book value: The price paid for the book value depends on the expected profitability of the book value, and leverage affects profitability.So our empirical analysis investigates the effect of leverage on both profitability and price-to-book ratios. Or, stated differently, financing and op

59、erating liabilities are distinguishable components of book value, so the question is whether the pricing of book values depends on the composition of book values. If this is the case, the different components of book value must imply different profitability. Indeed, the two analyses (of profitabilit

60、y and price-to-book ratios) are complementary.Financing liabilities are contractual obligations for repayment of funds loaned. Operating liabilities include contractual obligations (such as accounts payable), but also include accrual liabilities (such as deferred revenues and accrued expenses). Accr