Residual Operating Income Valuation

Career Aspiration:
To challenge myself within
an established CPA firm and
progress the corporate
ladder

Todays Focus:
Why ROIM is appropriate
Justification for key
assumption use in ROIM
The share price

Doan Yen Nhi Le

Why ROIM suitable for FCA Group

ROIM valuate a company assuming that the earning will
decline in the future
Suitable for Fiats as they might see their sale decrease in the
future

Competition pressure
New Hybrid Electric Vehicles from Japan, US and other
Europe companies

Government Intervention
Alarming emission level Government might increase fuel
price

Forecasting ATO and Calculation

of NOA

1. Forecast Asset Turn Over Ratio

ATO = Net sale/Average total asset

2. Calculation of Net Operating Asset

NOA= Sales/ATO

ATO relate to how much sale the group made, This ATO was then used to determine the
compare to how much they invest
Net Operating Asset for the FY15 and
forecast Net Operating Asset for the FY 16
Fiats ATO is not high
to 22
except from the Fiat 500 line, most of their
Due to the increase of sale over time, the
products are high-end
NOA is forecasted to increase throughout
the period of the next 7 years.
Hence, low asset turn over, however, they
generate high PM once sales are made
Relatively stable Net sale show positive
growth through out the period

Forecast Profit Margin and

Calculation of NOPAT

1. Profit Margin

Profit Margin = Net income/Net sales

. Most products is high end sales not happen
regular, but the products are relatively expensive,
hence, result in high profit margin once sales are
made.

2. NOPAT

NOPAT = Sales x Profit Margin

. The Net Operating Profit After Tax can

be determined using the forecast Profit
Margin which is equal to Sale times the
Profit Margin. The NOPAT also depends
. For 2016 PM of Fiats is forecasted to be 16% due to
on the Sales, therefore, as Sale of Fiats
the sales of Fiat Jeep brand continue to rocketed
increase over the period from FY16 to
amid surging demand for sport utility vehicle in 2016
FY22, the NOPAT, as well, show the
. And for the next 7 years will stay relatively stable
same positive change.
The Group adopted both differentiate and costleadership strategy which enable them to earn
income from both high and low end market,
especially in bad economic condition.

Share price is under value

Short coming
However, ROIM use accounting data rather than cash flow, therefore is it
vulnerable to accounting manipulation and misstatement if the company
management is playing accounting games or the accounting standard allow
transactions to bypass the income statement (Johnson. R et al, 2014).
Despite this fact, as staged in the independent audit report in Fiats 2015 annual
report that all of the evident the audit team obtained is sufficient and appropriate
to give the opinion and also they had identified and reported the misstatement of
20 million.
As a result, the accounting number of Fiats is reliable which lead to share price
generate from the valuation is highly accurate. Additionally, this model also
require sophisticate understanding of the public financial reporting method due to
large adjustment can be required (Finance Train, 2016).