85th International Atlantic Economic Conference

March 14 - 17, 2018 | London, United Kingdom

Effects of different EBIT construction on corporate financial performance

Friday, 16 March 2018: 3:40 PM
Jiri Strouhal, Ph.D. , Department of Finance and Accounting, Skoda Auto University, Mlada Boleslav, Czech Republic
Petra Stamfestova, Ph.D. , University of Economics-Prague, Prague 3, Czech Republic
Sarka Sobotovicova, Ing. Ph.D. , Accounting department, Silesian University in Opava, Karvina, Czech Republic
Beata Blechova, Ph.D. , accounting, Silesian University-Opava, Karvina, Czech Republic
Business corporations' level of financial performance is used to assess their success or failure and the fulfillment level for set corporate objectives. The essence of evaluating performance is to define the indicators which are relevant to the evaluators and to compare their values with the values achieved by chosen competitors, in the industry or in the past. There is a need for consistency in financial indicator construction selected for the benchmark.

This paper is focused on return on assets (ROA) and calculation methods. Often the assessment of the profitability is distorted because of different construction approaches. It is caused by multiple methods of calculating profit used in the denominator of the indicator. It is possible to measure ROA profitability based on net income, although the main aim of the indicator is better fulfilled with profit independent of capital structure and level of taxation. The production power of the assets is not influenced by where the assets are used. It is also not possible to increase production power by financing method. Therefore, there is consensus that ROA should be abstracted from the level of taxation and forms of financing.

The paper's aim is to assess if and how profit construction can influence the achieved value of corporate production power measured by ROA which belongs to the classical ratios measuring financial performance. The results of the conducted research based on the financial statements’ analysis of the top 100 Czech companies has shown that a different concept of the ROA nominator can have a relatively significant impact on the ranking of the business corporations. The results of only one-third of the companies will not be fundamentally distorted if an analyst uses operating income instead of the sum of net income, tax expenses and interest charges.

The results also proved that the level of indebtedness influences the difference in the ROA calculations too. In the case of the companies with higher indebtedness (above 45% of interest bearing debts) it is more appropriate to compare the ROA indicators based on the denominator containing earnings before interest and taxes. This denominator also has high comparative power for companies with lower indebtedness.