[Financial Management] Chapter 2: Financial Statement Analysis and Financial Forecasting (Part I)

Note 5: Turnover ratios (e.g., turnover times) cannot be additively decomposed; however, turnover days and sales percentages can be additively decomposed because both metrics consistently use revenue as their denominator. In contrast, the denominator of a turnover ratio varies depending on the specific asset involved. 16. Accounts Receivable Turnover Ratio Accounts Receivable Turnover Ratio = Revenue / Accounts Receivable Four key points to note: (1) Accounts receivable should ideally be represented by the monthly average. If only the beginning- and end-of-year figures are provided, use their average. If only the end-of-year figure is given—and either the beginning-of-year figure cannot be derived from the information provided or the question explicitly specifies using the end-of-year figure—then use the end-of-year figure. (2) Accounts receivable must be measured at gross amount (i.e., before deducting allowance for doubtful accounts), not net amount. Gross amount − allowance for doubtful accounts = net amount. The balance sheet reports the net amount, whereas the gross amount is disclosed in the notes to the financial statements. (3) Notes receivable should be included in the calculation of the accounts receivable turnover ratio. Strictly speaking, this ratio should be called the “accounts receivable and notes receivable turnover ratio,” but that name is unwieldy; hence, it is conventionally shortened to “accounts receivable turnover ratio.” This is justified because notes receivable are essentially enhanced versions of accounts receivable. (4) Revenue comprises credit sales and cash sales. Since accounts receivable arise solely from credit sales, the numerator should theoretically be credit sales—not total revenue. However, in practice, external analysts usually lack access to credit sales data; thus, total revenue is commonly used as a proxy. This substitution tends to overstate the accounts receivable turnover ratio. Regarding point (2) above—the distinction between gross and net amounts—another accounting concept merits attention: 17. Inventory Turnover Ratio There are two common approaches to calculating inventory turnover ratio: the revenue-based approach and the cost-based approach. • Revenue-based approach: Inventory Turnover Ratio = Revenue / Average Inventory Balance • Cost-based approach: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory Balance The difference between these two approaches lies in gross profit. (1) Since gross profit is typically positive, the revenue-based turnover ratio exceeds the cost-based one. (2) The impact of gross margin on the comparability of inventory turnover ratios parallels the impact of credit sales ratio (= credit sales / revenue) on the comparability of accounts receivable turnover ratios. Profitability 18. Profitability Ratios Five ratios are covered—including two introduced later in the management-oriented financial statements. 19. Earnings Per Share (EPS) EPS = Net Income / Number of Shares = Net Income Attributable to Common Shareholders / Weighted-Average Number of Common Shares Outstanding The numerator is “net income attributable to common shareholders” (abbreviated as “net income to common”), which requires deduction of preferred dividends but excludes common dividends. Regarding the denominator: In practice, EPS may be calculated using either a weighted-average or a fully diluted basis; the latter uses the number of shares outstanding at period-end. Theoretically, since the numerator represents a flow (i.e., an amount over time), the denominator should reflect a weighted-average count. Both the Financial Management textbook and accounting standards mandate the weighted-average method; therefore, exam answers must adopt this approach. 20. Per-Share Value Metrics • EPS = Net Income / Number of Shares = Net Income Attributable to Common Shareholders / Weighted-Average Number of Common Shares Outstanding • Book Value Per Share (BVPS) = Equity / Number of Shares = Equity Attributable to Common Shareholders / Number of Common Shares Outstanding (at year-end) • Revenue Per Share = Revenue / Number of Shares = Revenue / Weighted-Average Number of Common Shares Outstanding

CFA Level II – Equity Valuation

Firm Value = Value of Operating Assets + Value of Nonoperating Assets Market-Based Valuation: Price and Enterprise Value Multiples P/E Ratio Nonrecurring items typically include: gains and losses on asset disposals, restructuring charges, asset write-downs, impairment provisions, and effects of changes in accounting estimates. Two primary types of P/E ratios: • Trailing P/E (also known as current P/E): Calculated using the company’s earnings per share (EPS) for the most recent four quarters as the denominator. This is a backward-looking measure based on actual historical earnings. • Forward P/E (or Leading P/E): Calculated using forecasted EPS—typically for the next fiscal year. Because equity valuation is inherently forward-looking, investors and analysts generally place greater emphasis on forward P/E, as it better reflects the company’s expected future performance. • Since major events such as acquisitions or divestitures can significantly affect earnings, the forward P/E—also referred to as the leading P/E or prospective P/E—is the most appropriate P/E metric to use. • Common shareholders’ equity is calculated as total shareholders’ equity minus the value of preferred stock. To mitigate the impact of business cycles, analysts often use normalized EPS: • Historical Average EPS Method: Uses the average EPS over the most recent complete economic cycle (excluding adjustments for changes in firm size). • Average ROE Method: Estimates normalized EPS by multiplying the average return on equity (ROE) over the most recent complete economic cycle by the current book value per share (BVPS). When a company reports negative or extremely low earnings, P/E calculations encounter difficulties: • A negative P/E ratio is meaningless and unsuitable for comparison or analysis. • To address this issue, analysts sometimes use the earnings yield (E/P)—the reciprocal of the P/E ratio—which avoids distortions caused by negative or near-zero values. Earnings yield provides more consistent ranking and reflects the earnings generated per unit of share price.

DuPont Stock Beats EPS Estimates as Analysts See USD 166.60 Target

Sep 29, 2026

DuPont reported adjusted quarterly EPS of $1.88, surpassing consensus on 4% year-over-year revenue growth. Analysts set an average price target of $166.60 with 12 out of 17 brokerages rating the stock a "Buy".

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DuPont Stock Beats EPS Estimates as Analysts See USD 166.60 Target

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