Page 103 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2

LOS 19.b: Identify financial reporting choices and biases that affect
the quality and comparability of companies’ financial statements READING 19: INTEGRATION OF FINANCIAL STATEMENT ANALYSIS TECHNIQUES
and explain how such biases may affect financial decisions.

We consider the acquisition of a minority equity interest in TC, a publicly held MODULE 19.2: EARNINGS SOURCES AND PERFORMANCE
firm located in the United States. Thunderbird is a leading producer of electronic
components used in automotive, aircraft, and marine applications.
Sources of Earnings and Return on Equity
Return on equity (ROE) can be decomposed using the extended DuPont equation, as follows:

Using table below, can you decompose Thunderbird’s ROE using the extended DuPont equation.

Slight improvement in ROE over the period, from 19.51% to 21.26%.
Results from an increasing EBIT margin and decreased effects of taxes and interest, which is offset
to some degree by a reduction in financial leverage. Note that an increase in the interest and tax
burden ratios indicates that the effective tax rate and impact of interest charges on operating
earnings have decreased.
By removing the equity income of Eagle from earnings and the equity investment from total assets,
we can examine Thunderbird’s performance on a standalone basis. Another common adjustment
made by analysts is to remove the effects of any unusual items (e.g., provisions for restructuring
and litigation, goodwill impairment, etc.) from reported operating earnings (EBIT) before computing
the EBIT margin and the tax burden ratios.