Tài liệu Financial analysis of x20 joint stock company

NGUYEN DUC TUAN Paris Graduate School of Management Class: ieMBA.B01 Thai Nguyen University INTERNATIONAL EXECUTIVE MASTER OF BUSINESS ADMINISTRATION PROGRAM THESIS TITLE: FINANCIAL ANALYSIS OF X20 JOINT-STOCK COMPANY Student’s name: NGUYEN DUC TUAN Intake I 2012 NGUYEN DUC TUAN Class: ieMBA.B01 FOREWORDS Necessity of the research thesis During the business opxceration and production, the business control, determining strengths, weakness, and potentials of the business in order to develop timely solutions to exploit such potentials and strengths of X20 Joint-stock Company, and to overcome weakness aiming at maximizing the corporate values is the top and regular task of financial managers. To implement this task, financial managers utilizes very useful tool as corporate financial analysis. X20 Joint-stock Company is a company with financial potentials and prestige in garment and textile industry. However, business results have not been really effective. What are the reasons of this situation? What are the strengths not exploited and promoted by X20 Joint-stock Company? This requires the application of financial analysing tool in order to advise managers of X20 Joint-stock Company to adopt effective measures to improve business efficiency in order to increase the share price of X20 Joint-stock Company in the market From such reality, the author chooses the research thesis “Financial analysis of X20 Joint-stock Company”. The researching objectives of the thesis The thesis aims at three basic goals as follows: - Firstly, systematically studying the basis of arguments on corporate financial analysis including concept and objectives of corporate financial analysis, the materials used in analysis, method and content of corporate financial analysis. - Secondly, carrying out comprehensive financial analysis of X20 Joint-stock Company in the period of 2009 – 2011 on the aspects including asset and capital structure, business effectiveness, risks, cash flow, comparative analysis against the rivals in order to point out strengths and limitations about financial situation and its causes. NGUYEN DUC TUAN Class: ieMBA.B01 - Thirdly, basing on developing orientations of X20 Joint-stock Company and the causes to limitations in financial situation of X20 Joint-stock Company, the author proposes practical solutions for management board of X20 Joint-stock Company to improve business efficiency of the Company. Subject and scope of research The thesis focuses on researching argument system and financial analysis situation of X20 Joint-stock Company with comparison with rivals in the industry. The period of financial research and evaluation of X20 Joint-stock Company is from 2009 to 2011. Researching method To create basis for analysis and adoption of solutions in improving business operation effectiveness, the thesis utilizes following methods: - Research and collection of information through specialty magazines, data announced on websites, reports of the industry and companies. - Synthesizing and comparing analysis on the basis of summary data of garment and textile industry as well as practical data of the company in which the student is working for in order to introduce comments, evaluation, and proposal of implementing methods. - Evaluating and forecasting analysis about the needs, developing trends of the market and corporate. Scientific and practical meaning of the research thesis Scientifically, the thesis focuses on the research of argument basis on corporate financial analysis, especially systematic introduction about analytical methods and content of financial analysis. Practically, the thesis applies financial analysis arguments and methods in practice of X20 Joint-stock Company to determine strengths and limitations, causes NGUYEN DUC TUAN Class: ieMBA.B01 of financial limitations in order to consult Management Board of X20 Joint-stock Company in management of business operations in the future. Structure of the thesis In addition to the forewords, conclusion, list of reference, the main content of the thesis is divided into three chapters: Chapter 1: General theory about corporate financial analysis Chapter 2: Financial analysis of X20 Joint-stock Company Chapter 3: Solutions to improve financial management effectiveness in X20 Joint-stock Company CHAPTER 1: GENERAL THEORY ABOUT CORPORATE FINANCIAL ANALYSIS 1.1. CONCEPT, OBJECTIVES, MATERIALS AND METHODS OF CORPORATE FINACNIAL ANALYSIS 1.1.1. Concept of corporate financial analysis Financial analysis is a new concept since it is mainly developed in the 20 th century. Financial analysis may be defined as a collection of methods permitting the evaluation on financial situation in the past and at present, facilitating the decision making by the management board and accurate assessment of other corporates. In the last decades, the invention of new tools and development of new concepts help to screen financial analysis. First of all, we will study the concept of financial analysis, its objectives; followed by the standardization of information needs and analytical tools to be used. Financial analysis appeared in late 19 th century, and has been developed continuously and rapidly due to various reasons as follows: - Increasing corporate management need - Development of financial market - Establishment of national and multi-national groups - Wide application of information technology and computer NGUYEN DUC TUAN Class: ieMBA.B01 Financial analysis is based on accounts of the corporates. The harmonious combination of accounts eases the comparison between corporates and economic organizations. Currently, financial analysis is becoming essential to corporates so that they can understand their strengths, weakness in order to adopt measures to promote their strengths in parallel with the determination of causes to ineffective operation to have proper improving methods. Human being activities are activities of awareness. Therefore, as conducting any activities, irrespectively of simple or complicated, any individual or organization base on their awareness of objectives, natures, trends, and developing modes of the objects and phenomena. In economic management, awareness, decision and action constitute a dialectical triad of scientific management, in which awareness is the basis, and premise of decision-making, while organization is the one to carry out the decision. Awareness determines decision; therefore, proper awareness will lead to proper decision, and expected action. On the contrary, improper awareness will lead to improper decision. The most common concept is that: Financial analysis is the consideration, research of objects, phenomena in the organic, dialectical relationship between the items constituting such objects and phenomena. With such meaning, analysis is an important tool to be aware of the natures, properties, and development modes of the researched objects and phenomena. Therefore, corporate financial analysis is a tool to be aware of issues related to corporate finance. However, there are many subjects caring about and using economic, financial information of the corporate in various aspects and objectives. 1.1.2. Objectives of corporate financial analysis The information presented in the financial statement firstly serves the people of direct interests (contributories, creditors, investment partners, clients, employees…), then corporate leaders (Board of Directors, Management Board…), and finally people of indirect interests (tax agencies, financial agencies, statistics NGUYEN DUC TUAN Class: ieMBA.B01 agencies…). However, the data mentioned in financial statements fail to fully show up the contents required by users. For examples, investors need to know the profitability of assets, and the capital they have or will invest as well as the possible safety (risk) in the future, the augmentation in share values… Therefore, they have to use analytical technique to present more about main relationship mentioned in financial statement to satisfy the needs of concerned people. The most valuable information to users of financial statement is what will happen in the future. By comparing, evaluating, and analyzing trends, analysis of financial statement aims at main objectives as follows: Firstly, to fully, timely and honestly provide financial information to shareholders, creditors, investors, management board of Company to help them to make proper decisions in the future. Secondly, to make true evaluation on situation of company in the reporting period regarding capital, assets, level, rate and effectiveness of capital and asset utilization to understand the problems and their causes to propose proper measures in the planning period. Thirdly, to provide information about fund raising, modes of fund raising, loaning policy with the goal to increase profit, share value; and keep safety for investment capital. Financial analysis in various modes aims at serving various users such as managers, current shareholders, or people desiring to become shareholders of the corporate, financial analyst, people is participating in corporate operations, corporate creditors including banks, financial institutions, bill buyers, or bill sellers via bidding... Different users will make decisions basing on different purposes. Financial analysis by different user groups have to satisfy specialty issues of each group of direct or indirect interests. NGUYEN DUC TUAN Class: ieMBA.B01 a. Groups of direct interests: Financial analysis to managers Financial analyzing activities in corporate are called as internal financial analysis, which is different from external financial analysis conducted by analysts outside the enterprise. Thank to comprehensive information and clear knowledge about the enterprise, internal financial analysts have much more advantages to conduct the best financial analysis. Corporate financial analysis has various objectives: - To create regular evaluating cycles about the past business operations; to carry out financial balancing, profitability, solvency, financial risks of the enterprise. - To orient decisions made by Board of Directors as well as financial manager such as investment, funding, profit allocation... - To act as basis to implement financial forecasts; profit, investment, cash budget planning... - Finally, financial analysis is a tool to control activities of the enterprise. Financial analysis highlights the importance of financial forecast, and acts as basis for managers to clarify the financial policy in particular, and policies of the enterprise in general. Financial analysis to investors Shareholders as individuals or enterprises have direct concerns about the calculation of corporate values since they contribute their capital to the corporates and have to take risks. Shareholder income is allocated dividend and added value of investment capital. These two factors are affected by anticipated profit of the enterprise. In reality, investors often evaluate profitability of the enterprise. Individual shareholders of large companies in general must base on specialists (financial analysts). They specialize on researching economic-financial information, clarify corporate developing prospects, and evaluate shares in the financial markets. NGUYEN DUC TUAN Class: ieMBA.B01 Financial analysis experts utilize two methods to evaluate enterprises and estimate share value as follows: - Analysis basing on the research on financial statement, profitability, risk... to be mentioned in this thesis. - Graph analysis bases on evolvement graphs of share price and transaction volume. b. Group of indirect interests Financial analysis to creditors If financial analysis is developed in banks when they want to ensure the solvency of customers, financial analysis is used by lending, advancing, or selling on credit enterprises. Financial analysis is for other long-term debts with short-term loans. - In term of short-term loans, creditors pay special care about quick solvency of the enterprises, which means the enterprise ability to response to due debts. - In term of long-term loans, creditors must be sure about the solvency and profitability of the enterprises since the solvency and interest will depend on this profitability. Analyzing technique varies by nature and term of the loan; however, creditor are, irrespective of long-term or short-term loan, concerned about financial structure representing the risk level of borrowing enterprises. - Regarding investors, creditor financial analysis helps them evaluate the solvency, profitability... to make decision whether they should invest in or lend such enterprise. Above analysis shows that corporate financial analysis is an useful tool used to determine economic value; evaluate strength, weakness of the enterprise; find out objective and subjective causes helping each subject to make option and decision in line with the objectives of their concern. Therefore, corporate financial analysis is an crucial activity to all enterprise in the current market economy and international economic integration. NGUYEN DUC TUAN Class: ieMBA.B01 1.1.3. Materials used in analysis Enterprise-related information source is varied. Some information is obligatory and open; some only for shareholders. Many information is announced by financial organizations or Economic - Financial newspapers. The information may come from the enterprise or externally. 1.1.3.1. Internal corporate information Financial statement system of the Company refer to extremely important information since financial statements are used to synthesize the financial situation of the Company for a specific period of time. They must summarize a relatively high volume of information and be presented properly in a specific form and particular principle in order to provide users with true view about the financial power, solvency, risk, business-production outputs in the reporting period so that the Company can propose useful measures to promote the development of the Company. They are also valuable information helping securities investors to make right investment decisions. Documents used for analysis are financial statement of the Company, of which the most important and crucial is the balance sheet and business result report. a- Balance sheet Balance sheet is a combined financial statement generally reflexing all assets of the Company in two manners including capital and capital constituting source of Company at the reporting time. Therefore, balance sheet aims at describe financial power of the Company by presenting the things owned by the Company and those owed by the Company at a specific time. Balance sheet is regarded as a snapshot since it is developed at the end of an accounting period. This is the weak point of balance sheet when we use its data in financial analysis. In structure, balance sheet is divided in to two parts in the balancing principle that asset is equal to capital source. In both asset and capital source component, high liquidity is located on the top of the table and decreased as moving downwards. Therefore, in the asset NGUYEN DUC TUAN Class: ieMBA.B01 component, short-term assets are located upper, while long-term assets lower. The same is applied to the capital source component, which is listed by order and payment request. First are short-term debts (with maturity of less than 1 year), followed by medium and short term debts, and finally owned capital. All assets must be funded by a particular sponsorship such as loan or equity capital. Each component has its specific economic and legal meanings. Grasping economic and legal aspects of data mentioned on the balance sheet helps us to understand meaning of analytical ratios to be mentioned in the following part. - Assets reflect the value of all existing properties under the management and use right of X20 Joint-stock Company at the time of reporting. - In economic aspect, data mentioned in assets reflect scale and structure of existing property types of X20 Joint-stock Company at the reporting time in the form of money capital, receivables, inventories, fixed assets... Basing on this, it is possible to make overall evaluation on asset scale, operation nature, and asset using level of X20 Joint-stock Company. - In legal aspect, data mentioned in the assets show the existing properties under the management and use of X20 Joint-stock Company. - The asset reflects the forming sources of existing assets of X20 Joint-stock Company at the time of reporting. - In economic aspect, data in the Capital Source show the capital structure invested and mobilized in production and business of X20 Joint-stock Company. This enables the general evaluation on financial capacity and initiative of X20 Jointstock Company. - In legal aspect, data mentioned in the Capital Source show the legal responsibilities of X20 Joint-stock Company to creditors regarding payable debts, to clients regarding payables, to the owners regarding invested capital, to the State regarding payable amounts, to employees regarding payables.. NGUYEN DUC TUAN Class: ieMBA.B01 b- Business result report: if balance sheet is regarded as a snapshot reflexing the assets, capital, capital sources, debts of the company at the reporting time, business result report is considered as a slow movie about the general business situation and results in a specific accounting year. The data mentioned in this report provide the most combined information about the business patterns of the company in the period; indicate whether they generate profit or loss; and describe the use of capital potentials, labour, techniques, and business management experience of the company. It is a financial statement concerned by financial analysts since it provides data about the business operations carried out by the company in the period. It is also used as a instruction to forecast the operations of the company in the future. Business result report indicates the profitability or loss in the period. The report is prepared using the principle that it must reflect each type of revenue (revenue from business operation, service supply, financial activities, other incomes), and the costs used to get such revenues. The difference between revenue and cost constitutes the profit. The content of business result report may be varied by period depending on the management requirements, but has to reflect the basic items such as revenue, cost price, selling expenses, and business management expenses … c- Cash flow statement: Cash flow statement is one of important documents in the financial statement, the necessary document used and understood by managers. This report specifies the reasons why the cash and money equivalents vary in the accounting period. Especially, this report indicates all changes in money by three activities including business, investment and finance. The use of cash flow statement enables managers to follow the cash flow out and in to help the enterprises to calculate the solvency for the due debts. Cash flow statement does not carry out calculations such as income statement. Any non-monetary transaction will not be reflected in the cash flow statement. However, net income mentioned in the top of cash flow statement similar to the last line of the income statement is the NGUYEN DUC TUAN Class: ieMBA.B01 profit of X20 Joint-stock Company. By series of adjustments, cash flow statement explains the income into cash. d- Notes to financial statement: Notes to financial statement are a integral part of financial statement used by the enterprise to report or analyze data information mentioned in the balance sheet, Business result report, Cash flow statement as well as other necessary information upon the request of specific accounting standards. Notes to financial statement can mention other information if the enterprise see necessary for the honest and rational presentation of financial statement. Therefore, it can be seen that above financial statements clearly indicate financial situation of an enterprise. Despite being presented separately, financial statement sheets have close connection with each other. e- Additional accounting and financial information Financial analysis requires information about business situation of the enterprise: - Account books - Funding plan - Market share held domestically and foreignly - Diversification of business operation - Commercial policy - Short-term, medium-term, long-term prospects. This information is mentioned in financial statement, specially studied; and announces financial ideas and reports of the enterprise. Information is relatively abundant, the problem is how the users choose and analyze them to develop forecasts necessary for decisions by managers. 1.1.3.2. External information a. General information The information is related to business opportunities, which means the general economic situation at a specific proposed time. The regression or growth has strong NGUYEN DUC TUAN Class: ieMBA.B01 influence on the business results. In favorable opportunity, activities of the enterprise are expanded; profit of company as well as securities price in the stock market varies in the same direction with activities. General Statistics Office of Vietnam, Organization of Economic Cooperation and Development (OECD) regularly announce information related to general opportunities. Moreover, the surveys periodically carried out by General Statistics Office of Vietnam provide monthly results on prospects in industry and commerce, which are surveys about expenses, orders, market demand forecasts... In corporate financial analysis, the most important thing is learn the periodic appearance of opportunities, which means growth is normally followed by regression, and vice versa. b. Information by economic sectors In the border of the sector, the research locates the development of the enterprise in the connection with general activities of the business lines. The characteristics of business sector are related to: - The properties of the products - The applied technical procedures - Heavy or light industrial structure and their influence on profitability, reserve capital rotation, funding vehicles… - The developing space of economic cycles. Researches by sector clearly show the enterprises where they are in the general development of the industry by comparing their effectiveness with other enterprises in the sector, and learning from strong enterprises. In general, to carry out the most accurate corporate financial analysis, it is necessary to add internal factors such as business structure, line of business, products, technological procedures, employee capacity, management level of corporate managers…; external factors such as socio-political system, economic growth, scientific and technical progress, monetary policy, tax policy… NGUYEN DUC TUAN Class: ieMBA.B01 1.1.4. Corporate financial analysis method Corporate financial analysis method refers to the manners, techniques to evaluate the financial situation of the enterprise in the past, at present; and forecast the future. To conduct corporate financial analysis, we should use various methods in the method system of corporate financial analysis. Some main methods commonly used in practice are mentioned below. 1.1.4.1. Comparative method This is a method commonly used in economic analysis in general and corporate financial analysis in particular. The use of this method needs to ensure following contents: Comparative conditions: - Ensuring the existence of at least two quantities for comparison. - The quantities must ensure the comparability. It is the integration in economic content, calculating method, time, and measurement units. How to determine the principal for comparison: Depending on the analytical purpose to determine principal for comparison: -As determining the development trend and speed of original analytical indicators, comparative principal is determined as the numeric value of analytical indicators of the previous period or a series of previous periods. - As evaluating the implementation of proposed goals, tasks, comparative principal is the planning numeric value of analytical indicators. - As determining position of the enterprise, comparative principal is determined as average value of the sector or analytical indicators of rivals. Comparative techniques: Normally, they use two basic comparative methods as follows: - Comparison of absolute number refers to the determination of difference between values of indicators in the analytical period with those in the principal period. The comparative results indicate the variation in absolute number of analytical indicators. NGUYEN DUC TUAN Class: ieMBA.B01 - Comparison in relative number refers to the determination of increasing (decreasing) ratio of analytical indicators between actual period with principal period in order to evaluate the development rate or structure of these indicators. In addition, they utilize analytical techniques in longitudinal direction and horizontal direction. In which: Longitudinal analytical technique is the consideration and determination of ratio of each indicator in the general to see the importance of each indicator. Horizontal analytical technique is the quantitative comparison on one indicator. In reality, this is the application of comparative method in term of absolute and relative numbers regarding information collected after the processing and design in the form of table. 1.1.4.2. Detailed method Normally, during the corporate financial analysis, they concretize appearing process and achieved results via economic norms in following manners: + Detailing by constituting factors refers to the sub-division of studied norms into the elements constituting such norm. + Detailing by appearing time refers to the sub-division of the economic process and results by temporal appearing and development order. + Detailing by appearing space refers to the sub-division of the economic process and results by appearing and developing location of studied norms. 1.1.4.3. Ratio method In corporate financial analysis, financial coefficients are normally determined by directly dividing one norm by another to see the specific influence of each component norm on the norm to be analyzed. In addition to above methods, they also use ratio method as a highly practical method in analyzing financial coefficients of the enterprise. Financial ratios are divided into typical ratio groups reflecting basic contents by each operating goal of the enterprise. They are ratio groups on solvency, capital structure, operating capacity and profitability. NGUYEN DUC TUAN Class: ieMBA.B01 1.1.4.4. The method on analyzing the interactive connection between financial coefficients The return on equity of an enterprise is the combined result of a series of methods and management decisions by the enterprise. To understand the relationship between the capital use and product consumption to the rate of return of the enterprise, they develop an indicator system to analyze such impact. Dupont is the first company in the United State to establish and analyze the interactive relationship between financial coefficients. This method carries high practical meaning. The main relationships considered in Dupont method include: - The interactive relationship between after-tax rate of return above business capital with capital efficiency and rate of return. - Interactive relationships with rate of return above owned capital. In addition to above basic methods, in corporate financial analysis, they also use some other methods such as graph method, recurrent correlation method, linear planning method, econometrics method … Therefore, to have proper evaluation on financial situation of an enterprise, it is necessary to clearly identify the analytical objectives and select proper analytical methods in combination with the use of various methods to generate adequate and accurate conclusions. 1.2. CONTENT OF CORPORATE FINANCIAL ANALYSIS 1.2.1. Financial analysis by typical financial index Different companies different financial coefficients. Even one company has different financial index at different periods of time. Therefore, financial indexes are considered as the most typical representation of the financial situation of the company in a particular period of time. 1.2.1.1. Operating capacity index Capital effectiveness is always integrated with the existence and development of an enterprise. Therefore, the analysis of operating capacity index indicates the highest effective utilization of resources with the lowest expenditure. NGUYEN DUC TUAN Class: ieMBA.B01 a. Inventory turnover: Number of inventory turnover Cost of goods sold = Average inventory Inventory turnover shows how many times a company's inventory is sold and replaced over a period. A high turnover is highly appreciated since the investment in inventory is low but still effective, avoiding inactive capital and vice versa. However, the evaluation on this index must be combined with the consideration of sector, line of business. For example, if the Company trades in fruits, fresh foods, the high turnover is a good sign; which is reverse for wine production. From inventory turnover, we can calculate the average days for one inventory turnover. Number of days for an 360 days inventory turnover = ________________ Number of inventory turnover b. Receivables turnover: Receivables turnover Net revenue = (2) Average balance of receivables This index reflects the speed of converting receivables into cash. The higher turnover indicates quicker recovery of receivables; therefore, capital is not appropriated by enterprise or invested in receivables. Small turnover shows that the enterprise has high level of capital appropriation, resulting in lack of capital for production and business, requiring the enterprise to mobilize external capital and pay interests for such mobilized capital. From receivables turnover, analysts can determine the average collection period. The average collection period shows the days of a receivables turnover. Longer receivables turnover leads to shorter collection period and vice versa. NGUYEN DUC TUAN Average receivabl Class: ieMBA.B01 360 days = = e period Receivables Average balance of receivables x 360 (3) Net revenue turnover Long average collection period implies that the high level of capital appropriation in payment, and slow payback capacity. The consideration of this index requires the understanding of enterprise’s credit policy to clients, business strategy in the near future. c. Working capital turnover: Working capital turnover Net revenue = (4) Average working capital This index shows how many dongs of net revenue can be generated from the use of one dong of working capital in the period, which means that it measure the effectiveness of working capital in the enterprise. The higher this coefficient is, the higher the working capital effectiveness is. This is because of rapid goods consumption, low level of inventory, low level of receivables…, decrease in expenditures and increase in profit. On the contrary, low coefficient implies high volume of inventory, high cash balance, failure in collecting receivables…, resulting in the need to review financial situation of the enterprise to propose correction measure. While working capital turnover reflects the number of working capital rotation, working capital turnover period shows the days of a working capital turnover. Working capital turnover period 360 days = (5) Number of working capital turnover This index indicates the days of a working capital turnover, as an inverse of working capital turnover. NGUYEN DUC TUAN Class: ieMBA.B01 Therefore, low index is a good sign. Long working capital turnover period means working capital inactiveness, appropriation, resulting in low profitability from working capital. d. Fixed capital turnover: This index is used to measure the fixed capital effectiveness, which means how many dongs of net revenue can be generated from the use of one dong of fixed capital in the period. The consideration of this index requires the consideration of fixed asset structure. It is necessary to think carefully before investing in new fixed assets or evaluate whether the depreciation of old fixed assets is proper. Fixed effectiveness capital Net revenue = (6) Average fixed capital g. Capital turnover: This index says how many monetary units generated by suing one monetary unit of capital or how many turnovers the capital of the enterprise can be used in a period. This index can be used to evaluate capital management level of the enterprise. The higher the ratio is, the higher the profit, the competitiveness, the prestige of the enterprise in the market are. Net revenue Capital turnover = (7) Average capital 1.2.1.2. Profitability index group For investors, this index is extremely important since it is attached to their economic interests. It is a basis to measure business results in a particular period and foundation for investors, managers to make financial decisions in the future. NGUYEN DUC TUAN Class: ieMBA.B01 a. Return on sales (ROS): This index indicates how many dongs of profit can be generated from one dong of net revenue in the period. Profit ROS = (8) Net revenue (Profit in above formula is the pre-tax or after-tax profit) b. Return on assets (ROA): ROA tells how many pre-tax and after-tax profit and EBIT were generated from the use of one unit of asset. ROA gives an idea as to how effective and efficient management is at using its assets to generate earnings. Return on assets (ROA) = Pre-tax and pre-interest profit Total average assets (9) By adding loan interest into pre-tax profit, we have total profit before allocating to investors (loan and contribution). Because the denominator comprises of the sources provided by lender and contributors, the numerator must contain the payback resource for both. This indicator is important to investors since pre-tax profit and interest are the source to pay loan interest. Therefore, if return on assets is higher than interest rate, the enterprise makes effective use of capital and is able to pay loan interest. On the contrary, if this ratio is lower than loan interest, enterprise can hardly pay loan interest or make effective use of capital. c. Return on investment (ROI): This index is used to evaluate efficiency of an investment or to reflect how many monetary units of after-tax profit can be generated from one monetary unit of investment. The higher the index is, the more effective the enterprise operation is.