Research the decomposition analysis of performance ratio and then be able to apply the ratios. You will need to respond to and explain the following:
- Define, describe and illustrate the decomposition of ROI and ROE. Form numerical illustrations to clarify your discussion.
- Extend the basic analysis to show the connection of this decomposition analysis to the common-size income statement. Explain and illustrate clearly the connection and the value of the analysis,
- Using the decomposition of ROI and ROE, form this analysis on a study company and a comparison company using the most recent three years of financial data. Some potential companies could be: Lowes and Home Depot, Toyota and Honda, PepsiCo and Coca Cola. Review the referenced paper by Prendergast (2006). Describe the research question being addressed. Discuss the methods used and the conclusions reached by the study.
Support your paper with a minimum of five (5) external resources In addition to these specified resources, other appropriate scholarly resources, including older articles, may be included.
Length: 5-7 pages not including title and reference pages
Your paper should demonstrate thoughtful consideration of the ideas and concepts presented in the course and provide new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards.
Decomposition Analysis
This week in the course studies the decomposition analysis. This analysis is aimed at understanding the drivers to some of the more important performance ratios, i.e. the return on investment (ROI) and the return on equity (ROE). The analysis offers insight to the value and risk associated with financial leverage. The analysis is also directly connected to the common-size income statement through the profit margin.
Review the resources listed in the Books and Resources area below to prepare for this week’s assignments.
