Advanced_Financial_Reporting

PartⅠComparison of Performance Metrics Performance metrics are significant for individual investors to understand and assess company’s financial performance and finally make informed decisions, because they indicate situations and changes in key items in financial statements. However, different companies usually establish different performance metrics. 1.1 Wal-Mart’s 5 Performance Metrics Wal-Mart, a leader in the retail industry worldwide, establishes 5 main performance metrics: total sales and comparable store sales, operating income, earnings per share, return on investment and free cash flow. 1.1.1 Total Sales Total sales indicate the amount of money Wal-Mart brought in during one past financial year. Total net sales is a more accurate figure by deducting returns, allowances for damaged or missing goods and any discounts allowed from total sales. Comparable store sales is a measure of performance of existing retail stores by comparing sales for such stores for a particular period with the corresponding period in the prior year. 1.1.2 Operating Income Operating income shows the amount of profit realized from a business’s own operations, excluding operating expenses and depreciation from gross income. The ratio of operating income and net sales refers to operating margin, which indicates the left proportion of a company’s revenue after paying for variable cost of production (Investopedia, 2010). 1.1.3 Earnings per Share Earnings per share indicates Wal-Mart’s profitability by showing the portion of a company’s profit allocated to each outstanding share of common stock. It is calculated as: EPS = (net income – dividends on preferred stock)/weighted average outstanding shares. 1.1.4 Return on Investment Return on investment is a simple, popular and flexible financial metric for evaluating the efficiency of an investment. The general formula is ROI= (gain from investment-cost of investment)/cost of investment. In Wal-Mart, ROI is modified as adjusted operating income over average investment for that fiscal year. 1.1.5 Free Cash Flow Free cash flow can be defined as net cash provided by continuing operating activities in the financial year subtracting capital expenditures for property and equipment at that period. It indicates company’s ability to generate additional cash from business operations and allows the company to achieve opportunities which increase shareholders’ value. 1.2 Lianhua’s 5 Performance Metrics Lianhua is nationwide chain retail operators in China and occupies a leading position in the fast moving consumer goods industry. It is assumed that Lianhua has such 5 performance metrics: growth in turnover, consolidated income, cost, net profit and liquidity. 1.2.1 Growth in Turnover This measures increase in the sales revenue of merchandise. It reflects the continuous operation in existing stores and the performance of now stores. 1.2.2 Consolidated Income This represents the sum of gross profit, other revenues and other income. Gross profit measures sales subtracting costs directly related to those sales. 1.2.3 Cost Cost refers to operating cost, which indicates the daily expenses incurred in business operation. Overall cost ratio includes ratios such as ratio of labour cost, ratio of utility expenses, depreciation and amortization. 1.2.4 Total Net Profit This shows what the company has earned in a given period of time by subtracting total expenses from total revenue (Investorwords, 2010). This performance metric measures the efficiency of cost management and the profitability of the company’s core business. 1.2.5 Liquidity Liquidity measures the ability to convert an asset to cash and the ability to pay off its short-terms debts obligations. High liquidity indicates sufficient cash flow, which ensures the operation capability of commodities and outlets expansion. It mainly concerns two ratios: turnover period of company’s trade payables and inventory turnover period. 1.3 Comparison of Performance Criteria Superficially, it is recognized that the two annual reports particularize similar financial metrics for investors to analyze. Notwithstanding, otherness will raise once meticulous examinations and comparisons are studied. 1.3.1 Sales Lianhua illustrates its total turnover of RMB 20.70 billion with its growth rate of 14.46% in 2008, and the same stores sales growth of 8.3% with corresponding explanations. It is fairly to say that they are crucial, but are far less enough. Compared with Wal-Mart’s first metric, total sales and comparable stores sales growth rates in the past three years are provided as well. It is deemed more convincing that vertical comparisons exemplify a trend which is worth of references. For instance, the falling increase rate of comparable stores sales in 2008 encourages aborative causes analysis and expectations of future development. While, Lianhua just roughly summarize the steadily increasing turnover results from excellent performance. In addition, total sale information from three components is also presented in Wal-Mart’s to be open to investors. 1.3.2 Income Similar situation occurs in face of the ‘income’ criterion. A table showing Wal-Mart’s operating income from three segments and in past three years is exhibited, together with literature illumination. Whereas, there is only brief statements of current year’s consolidated income and growth rate value from Lianhua’s metric. It could be denoted that ‘window dressing’ exists in Lianhua’s case while Wal-Mart approaches the reasons for underperformed segments. 1.3.3 Earnings With regard to the earnings, Lianhua puts emphasis on the absolute value of net profit, which covers operating profit, its increase rate, total net profit attributable to shareholders, net profit margin attributable to shareholders and earnings per share in 2008. These are indeed a method of measurement the profitability of the business to certain extent. By contrast, an EPS ratio is one and only one piece of information from Wal-Mart here. However, it is enough and from another point of view reflects Lianhua’s information overload. Investors prefer comprehensive but simplify, overall but logic performance metrics. EPS is used as a considerable tool-indicator of a firm's performance from the perspective of investors and potential investors (Michaelides, n.d.). Furthermore, it is also a widely used ratio that plays a vital role in valuation of the shares of the company (Singh, 2009). However, EPS also has restrictions and drawbacks which investors should regard critically. Firstly, as EPS is not continued data to indicate growth target as it is historical ratio in certain one year. Moreover, it lacks comparability once the company allots shares, rights issue or other kinds of share splits. Besides, EPS is only a general ratio in evaluation which can not reflect investment risk as well as overview of company’s financial situations (Xiao, 2009). 1.3.4 Cost Lianhua lists the cost ratio as one of the indexes for investment analysis. The change in cost ratios of labour and of utility expenses, depreciation and amortization reveals the situation that Lianhua had tried to increase cost efficiency to achieve better profit performance. Nevertheless, Wal-Mart chooses other metrics to directly justify business financial operation. 1.3.5 ROI Just as managers of Wal-Mart believe, return on investment (ROI) is commonly agreed as a financial performance measurement and return on asset (ROA) is based on ‘GAAP’ which is the most directly method to evaluate and compare efficiency of investments (Wang and Wang, 2006). As ROI is also the product of return on sales and asset turnover, it relates intrinsically with cost, sales and investment (ibid). Wal-Mart use ROI as one key metric to embody the profitability of capital through eliminating non-comparable factors from differentiated amount of investment. Moreover, although Wal-Mart is a retailing giant, it offers a rational measurement for investors to judge investing opportunities and make decisions. 1.3.6 Cash flow Wal-Mart lists cash inflow and cash outflow to calculate the free cash flow in the past three years given the reason that it is the key to measure the capability of generating additional cash for further business operations. It is believed by investors that focusing myopically on earnings are often clouded by accounting manipulation; hereby the "real" cash that a firm generates provides a much clearer and authentic view of financial performance (Investopedia, 2010). By contrast, Lianhua also treats cash flow important. However, again Lianhua discloses too little information, i.e. the cash inflow and cumulated bank and cash account, to persuade investors that the business did operate remarkable and is expected to perform in good condition continuously. In any case, it is to Lianhua’s credit that it points out the trade payable turnover period and inventory turnover period which are important indicator reflecting business operating capability (Zheng, 2009). Notwithstanding, what makes it less meaningful is lacking vertical comparison. In addition, Lianhua also mentioned financial investment, which may deliver a signal about its riskless version. 1.4 Way of Communication It is vital to evaluate the efficiency of these metrics as a tool of communication between companies and investors. According to Frank D’Andrea, Director of Corporate Accounting and Reporting with Hydro One in Canada, it is necessary to decide whether a principles-based or an objectives-based disclosure framework will facilitate to convey information in a useful, organized and transparent manner (Global Accounting Alliance Ltd, 2009). More directly, the way of communication can be analyzed in three major aspects, form, content and expression. 1.4.1 Form In the financial reviews section of management’s discussion and analysis, Wal-Mart clearly points out its five performance metrics while Lianhua simply lists several points without any conclusive indication. Readers will get overview of Wal-Mart’s performance more easily based on the direction than Lianhua’s report since they are very likely to be confused by different headlines and have to pick out metrics by themselves and to think from Lianhua’s perspective, which is reversed. In addition, there are also data inefficiency and redundancy problems in Lianhua’s report. It has reported the data such as gearing ratio and turnover of trade payables in the form of five years financial highlights, but does not analyze them in management’s decision and analysis part which is the core reference section for investors. In fact, simply listing those ratios one by one without any critical and detailed analysis makes no sense to readers. 1.4.2 Content It is noted that Wal-Mart emphasizes ratios like EPR, ROI, and ROA to directly talk to investors while Lianhua merely generates each metrics in a wide range of scope, actually not specifying any one. As a result, readers are easy to confuse and so it is still difficult to make a decision even though they may think that important content has been mentioned. For example, Lianhua gives the liquidity data to investors, without going into deeply and none of which explain directly and completely. Moreover, Wal-Mart reports its performance by establishing a number of quantitative expressions while Lianhua prefers to descriptive texts. In this way, Wal-Mart makes readers feel clear and concentrated, while Lianhua may contain unnecessary information more or less in paragraphs of words. In general, Wal-Mart reports more specifically and efficiently compared with Lianhua. Another point here is that to be a most useful communicator between companies and investors, the content is important to be investor-oriented. According to investor’s view, receivables turnover and inventory turnover are important metrics for financial operation of a company (Zheng, 2009). For the performance metrics to be meaningful, detailed analysis of financial statements should be provided to investors in this part but not only abstracts (ibid). With regard to this point, neither of Wal-Mart and Lianhua does well. With rapid development in accounting standards and changes in the mission of companies, business concerns corporate social responsibilities (The Global Compact, 2006). Readers no longer care about single financial interests, but also pay attention to relevant statistics and financial performance that could reflect CSR concerns, which will be more and more important to influential companies like Wal-Mart and Lianhua. 1.4.3 Expression A lack of good expression could make communication ineffective even when the form and content are well prepared. Looking at the metrics of Wal-Mart, each of them is supported by relevant description and logical analysis. The reason for choosing each metric is also relatively easy to be understood with the help of well-approached diagrams. However, under each title of Lianhua’s metrics, a range of topics are included there. Furthermore, many simply described sentences seem to hide information, so actually it is poorly communicated. This might be the strategy of Lianhua which is used to conceal some behaviour such as manipulation of statistics because some indexes such as return on investment are calculated to be better than those of Wal-Mart but Lianhua has not used them as metrics. Companies are varied in choosing strategies, but to clearly and effectively convey the information in management’s discussion and analysis contributes to communication a lot. Part Ⅱ Redetermination of Lianhua’s Performance and Two Companies’ Performance Gap To better illustrate the performance gap between the two companies, the metrics established by Wal-Mart will be applied to Lianhua’s report. After that, two ways of comparison are displayed: comparison of two firms’ performance under Wal-Mart’s metrics and comparison of Lianhua’s performance under two different metrics. 2.1 The Comparison of Lianhua and Wal-Mart’s Performance The comparison of the Lianhua between Wal-Mart will be illustrated according to Wal-Mart’s performance metrics, namely total sales and comparable store sales, operating income, earnings per share, return on investment and free cash flow. Though these two supermarket chain stores both have operations within Greater China, they are largely different in nature when compared with each other using the group consolidated financial statements. Considering the difference that purchasing-power-parity would have on different currencies and the huge discrepancy between their operation scales, we hereby resist translating USD into RMB and comparing the absolute value of any metrics between the two. 2.1.1 Total Sales and Comparable Store Sales Table 1 and 2 show the total sales of Wal-Mart and Lianhua in this metric respectively. The most informative indicator here is the percentage increase in sales for each type of comparable stores. Although two companies are not of the same scale, Lianhua seems to be catching up with Wal-Mart in that the overall sales increase for Lianhua from 2007 to 2008 is (14.46%-8.56%=)5.9% higher than that of Wal-Mart. Whereas, a year ago, Lianhua’s sales increase was lag behind with a mere 10% compared with Wal-Mart’s 11.67%. These figures imply an upward trend and downward trend of Lianhua and Wal-Mart respectively. Observing the proportional change of three different types of stores, Wal-Mart seems to grow faster in its international business while Lianhua tends to have a shift from the convenience stores towards supermarkets of larger scale. Table 1 Wal-Mart’s performance Wal-Mart Fiscal Year Ended 31 January 2008 2007 2006 (Dollar amount in millions) Net Sales Percentage of total Percentage Increase Net Sales Percentage of total Percentage Increase Net Sales Percentage of total Wal-mart Stores 239,529 63.96% 5.85% 226,294 65.59% 7.81% 209,910 67.94% Sam's Club 44,357 11.84% 6.67% 41,582 12.05% 4.48% 39,798 12.88% International 90,640 24.20% 17.54% 77,116 22.35% 30.18% 59,237 19.17% Total sales 374,526 100.00% 8.56% 344,992 100.00% 11.67% 308,945 100.00% Table 2 Lianhua’s performance (N1) Lianhua Fiscal Year ended 31 December 2008 2007 2006 (RMB amount in thousands) Sales Percentage of total Percentage Increase Sales Percentage of total Percentage Increase Sales Hypermarket 11,910,715 57.53% 20.97% 9,846,161 54.44% 14.91% 8,568,580 Supermarket 7,045,981 34.03% 7.40% 6,560,466 36.27% 5.15% 6,238,956 Convenience Stores 1,591,675 7.69% 4.44% 1,524,042 8.43% -1.36% 1,545,061 Other businesses 154,070 0.74% -1.36% 156,188 0.86% 72.71% 90,433 Total sales 20,702,441 100.00% 14.46% 18,086,857 100.00% 10.00% 16,443,030 The following two tables show the comparable store sales of Wal-Mart and Lianhua. As notated by Wal-Mart, the comparable store sales measure the performance of existing stores by looking at their growth rate for a specific period. For Wal-Mart, according to its annual report, comparable store sales in fiscal 2008 were lower than fiscal 2007 due to softness in home and apparel categories and pressure from new store expansions within the trade area of established businesses, which negatively impacted about 1.5% of the overall performance in both years. Oppositely, Lianhua seemed to have obtained a growth in comparable store sales. Lianhua has undertaken a “strong outlet strategy”, which strives to strengthen basic operation capacities, optimize merchandise mix, improve both the supply chain system and service quality in order to enhance core competitiveness. It did not release measurable impacts of its newly opened stores in 2008, which is commonly negative. It is arguable that by adjusting for Lianhua’s expansion in 2008 of 464 stores, the growth rate of comparable store sales should be even higher, demonstrating an upward trend. Table 3 Wal-Mart’s comparable store sales Fiscal Year Ended January 31 (Dollar amount in millions) 2008 2007 2006 Wal-Mart Stores 1.0% 1.9% 3.0% Sam’s Club 4.9% 2.5% 5.0% Total U.S. 1.6% 2.0% 3.4% Table 4 Lianhua’s comparable store sales Fiscal Year Ended January 31 (RMB amount in thousands) 2008 2007 2006 Hypermarket 7.8% Supermarket 9.5% Convenience Stores 7.69% 2.1.2 Operating Income The operating income of Wal-Mart and Lianhua is illustrated in Table 5 and 6 respectively. The operating incomes for both companies in 2008 were jeopardized by the worldwide economic downturn with respect to the overall percentage increases. However, this ailing situation had a much more severe impact on Lianhua than on Wal-Mart since the former obtained a negative increase while the latter only experience a slowdown of growth rate. Another important gap between the two companies is that Wal-Mart is far more stable compared with Lianhua, which had drastic fluctuations in growth rate of operating income. For example, the growth rate of Lianhua’s hypermarkets from 2007 to 2008 was an amazingly 2177.54% while it was -111.34% for the previous period. Similar situation applies to its convenience stores and other businesses. Table 5 Wal-Mart’s operating income Wal-Mart Fiscal Year ended 31 January 2008 2007 2006 (Dollar amount in millions) Operating income Percentage of Total Percentage Increase Operating income Percentage of Total Percentage Increase Operating income Percentage of Total Wal-mart Stores 17,516 79.63% 5.39% 16,620 81.09% 8.86% 15,267 81.58% Sam's Club 1,618 7.36% 9.32% 1,480 7.22% 5.19% 1,407 7.52% International 4,769 21.68% 11.82% 4,265 20.81% 24.05% 3,438 18.37% Other (1,907) -8.67% 2.09% (1,868) -9.11% 33.52% (1,399) -7.48% Total 21,996 100.00% 7.31% 20,497 100.00% 9.53% 18,713 100.00% Table 6 Lianhua’s operating income (N2) Lianhua Fiscal Year ended 31 December 2008 2007 2006 (RMB amount in thousands) Operating income Percentage of Total Percentage Increase Operating income Percentage of Total Percentage Increase Operating income Percentage of Total Hyper- market 118,660 33.03% 2177.54% 5,210 1.25% -111.34% -45,950 -20.02% Super- market 269,120 74.91% 16.39% 231,220 55.41% 8.19% 213,720 93.12% Convenience Stores 26,570 7.40% -40.60% 44,730 10.72% 50.40% 29,740 12.96% Other businesses -55,087 -15.34% -140.47% 136,134 32.62% 325.31% 32,008 13.95% Total 359,263 100.00% -13.91% 417,294 100.00% 81.81% 229,518 100.00% 2.1.3 Earnings per Share Table 7 and 8 highlight the performance of Wal-Mart and Lianhua in this metric respectively. From the perspective of an individual investor, a constant growing EPS, which reflects an increase profit per weighted average common shares, will generally be more appealing. Lianhua climbs more rapidly, demonstrating ((0.62-0.43)/ 0.42=) 44.19% increase from 2007 to 2008 compared with Wal-Mart’s ((3.16-2.92)/ 2.92=) 8.22% during the same period. Observed that, Wal-Mart’s increase of EPS has already been better in the period than ((2.92-2.72)/ 2.72=) 7.35% for the period from 2006-2007 due to increases in income from continuing operations. Wal-Mart has a company share repurchase program which in 2007, upgraded to 15 billion dollars. It is said that under the program, repurchased shares are constructively retired and returned to unissued status. Hence, there is positive influence on diluted earnings per share (although it is observed that the diluted common shares are greater than basic common shares). Overall, Lianhua has a better performance with respect to this metric. Nevertheless, since EPS can be manipulate in ways such as share repurchases, the significance and meaning of this metric selected by Wal-Mart should be with more consideration. Table 7 Wal-Mart’s Earnings per Share Wal-Mart Fiscal Year ended 31 January (Dollar amount) 2008 2007 2006 Diluted earnings per share 3.16 2.92 2.72 Table 8 Lianhua’s Earnings per Share (N3) Lianhua Fiscal Year ended 31 December (RMB amount) 2008 2007 Diluted earnings per share 0.62 0.43 2.1.4 Return on Investment Table 9 and 10 demonstrate the performance of Wal-Mart and Lianhua in this metric respectively. Both ROI and ROA for Wal-Mart declined in 2008 while those of Lianhua were growing. Wal-Mart experienced a decrease in ROI because its adjusted operating income grows at a slower rate than its invested capital, including recent investments in Seiyu, CHARHCO, Sonae and Bounteous Company Ltd. Furthermore, Lianhua appears to be superior in both ratios when comparing its 24.4% and 17.9% (excluding coupon income) with Wal-Mart’s 19.5% and 8.4% in 2008 respectively. It is arguable here that the better performance of Lianhua with respect to ROI reflects its privilege in using the customers’ prepaid money of OK card and similar coupons in gaining return on its investments. To better illustrate it, an item called “interest income” should be focused on. For Wal-Mart, this item counts (305/30238=) 1.01% of adjusted operating income while for Lianhua, this item counts (85336/ 2142320=) 3.98%. This huge discrepancy in interest income, contributes to Lianhua’s better ROI compared with Wal-Mart. In addition, another item “depreciation and amortization” affects the results similarly. It counts 20.89% and 24.59% of adjusted operating income for Wal-Mart and Lianhua respectively. However, the superior ROA of Lianhua over Wal-Mart leads us to confusion. One possible explanation might be due to the difference in two accounting standards used. Table 9 Wal-Mart’s ROI and ROA Wal-Mart Fiscal Year ended 31 January (Dollar amount in millions) 2008 2007 Calculation of returning on investment Numerator Operating income 21,996 20,497 +Interest income 305 280 +Depreciation and amortization 6,317 5,459 +Rent 1,620 1,441 =Adjusted operating income 30,238 27,677 Denominator Average total assets of continuing operations 157,551 143,909 +Average accumulated depreciation and amortization 29,059 24,907 -Average accounts payable (29,427) (27,096) -Average accrued liabilities (15,237) (13,975) +Rent * 8 12,960 11,528 = Invested capital 154,906 139,273 ROI 19.5% 19.9% Calculation of returning on assets Numerator Profit for the year Minority interest Income from continuing operations before minority interest 13,290 12,603 Denominator Average total assets of continuing operations 157,551 143,909 ROA 8.4% 8.8% Table 10 Lianhua’s ROI and ROA Lianhua Fiscal Year ended 31 December (RMB amount in thousands) 2008 2007 Calculation of returning on investment Numerator Operating income 359,236 417,294 +Interest income (N4) 85,336 38,818 +Depreciation and amortization (N5) 526,702 484,135 +Rent (N6) 1,171,046 994,695 =Adjusted operating income 2,142,320 1,934,942 Denominator Average total assets of continuing operations (N8) 2,171,838 2,237,089 +Average accumulated depreciation and amortization(N8) 1,547,287 1,481,149 -Average accounts payable(N8) (2,972,653) (2,690,007) -Average accrued liabilities(N8) (1,326,604) (976,757) +Rent * 8 9,368,368 7,957,560 = Invested capital 8,788,236 8,009,034 ROI 24.4% 24.2% Calculation of returning on assets Numerator Income from continuing operations before minority interest 462,230 380,649 Denominator Average total assets of continuing operations (N8) 2,171,838 2,237,089 ROA 21.3% 17.0% 2.1.5 Free Cash Flow Table 11 and 12 compare the performance of Wal-Mart and Lianhua on free cash flow. The free cash flow growth rates for the period of 2006-2007 and 2007-2008 are ((4331-3813)/ 3813=) 13.59%, ((5417-4331)/ 4331=) 25.08% for Wal-Mart and ((2414040-879189)/879189=) 174.58%, ((1101028-2414040)/2414040=) -54.39% for Lianhua respectively. Observed is that Lianhua’s performance was unstable, which induced a fairly good result for the first period while for the second period it declined drastically, even to negative. This was manifested by Lianhua’s aggressive expansion in 2008 alone, with 464 new stores, accounting for more than 10% of its existing stores, which were 3872 stores in total. Nonetheless, though declined, Lianhua still maintain a healthy cash flow, which was due to a steady growth of turnover and results with a mature development of the membership system. On the other hand, Wal-Mart experienced a steady increased growth rate. The above figures indicate that Wal-Mart appears to have a better management of liquidity. Nevertheless, one should also be cautious when come to this conclusion, since it might as well be that due to Wal-Mart’s lack of good investments during the periods, which symbolize a great proportion of cash outflow, while the cash inflows were relatively inerratic that its free cash flow continues to increase without dramatic decreases. This guess is reinforced by Wal-Mart’s annual report that its pace of expansion has been slowed down in the US. Table 11 Wal-Mart’s free cash flow Wal-Mart Fiscal Year ended 31 January (Dollar amount in millions) 2008 2007 2006 Net cash inflow from operating activities 20,354 19,997 18,343 Payments for property, plant and equipment and construction in process (14,937) (15,666) (14,530) Free Cash Flow 5,417 4,331 3,813 Table 12 Lianhua’s free cash flow Lianhua Fiscal Year ended 31 December (RMB amount in thousands) 2008 2007 2006 Net cash inflow from operating activities 1,597,908 3,020,492 1,722,123 Adjusted: Interest expense (N9) 0 0 0 Taxation (N9) 63,406 (27,583) 10,687 Less: Minority interest (73,889) (112,348) (22,125) 1,587,425 2,880,561 1,710,685 Less: Payments for property, plant and equipment and construction in process (440,805) (463,578) (821,653) Payments for land use rights (36,755) (291) (259) Payments for intangible assets (8,837) (2,652) (9,584) Free Cash Flow 1,101,028 2,414,040 879,189 2.2 The comparison of Lianhua’s performance under two performance metrics When we try to compare Lianhua’s performance under two different performance metrics, two issues are worth noting. Firstly, the comparison is only meaningful when the two metrics have the same performance criteria such as ROA in this context. Secondly, the comparison between two absolute figures regarding one performance indicator under two different metrics which have different calculation methods does not make any sense. However, one of the acceptable comparisons we can make is to compare the change in percentage under the two metrics. For the first three Wal-Mart’s performance metrics, Lianhua’s total sales, operating income and earnings per share are identical compared to the original data. The first two conclusions are derived from aggregating the net sales and operating profit from Lianhua’s segments respectively. With regard to the EPS, as there were no dilutive options and other dilutive potential shares in issue during both periods presented, diluted earnings per share is the same as basic earnings per share, which are RMB0.62 in 2008 and RMB0.43 in 2007. Wal-Mart calculated ROI and ROA as the fourth performance metrics. Although we figured out the ROI figure as 24.4% and 24.2% in 2008 and 2007 respectively for Lianhua by adopting Wal-Mart’s calculation method, we have no original data from Lianhua under its own performance metrics. Hence, no comparison can be made here. In terms of ROA, Lianhua did state that its ROA in 2008 was 2.28% and in 2007 was 2.84%. On contrast, under Wal-Marts’ metrics, its ROA can be as high as 21.3% in 2008 and 17% in 2008. This contradiction is largely due to the different ROA calculation approaches. However, one interesting point worth noting is that under Lianhua’s own metrics, ROA in 2008 is slightly lower than that in 2007 but under Wal-Mart’s metrics, a significant increase from 2007 to 2008 can be seen. Lastly, Lianhua did not include free cash flow under its own metrics as supplemental to the entire flow cash statement as Wal-Mart did. Hence, no comparison with respect to free cash flow for Lianhua under two performance metrics is available again. 2.3 Notes 1. The figure for total sales can be found in P14 but the figure for comparable store sales for Lianhua can be found only in 2008 in P20. 2. Each segment's operating income in 2008 can be found in the text in retail business in P20 in 2008 report. The operating income for 2007 and 2006 can be found in P20 2007 and P20-21 2006 respectively. 3. As there were no dilutive options and other dilutive potential shares in issue during both periods presented, diluted earnings per share is the same as basic earnings per share. 4. Interest income Interest income refers to the finance income which details the interest income on cash and cash equivalents. 31 December (RMB in thousands) Reference Page 2008 2007 2006 Interest Income P99 85,336 38,818 26,781 5. Depreciation and amortization (RMB amount in thousands) Reference Page 2008 2007 2006 Amortization of other non-current assets P126 1,523 1,987 2,646 Amortization of software P126 20,329 19,806 13,938 Amortization of land use rights P126 11,665 9,971 7,593 Depreciation of property, plant and equipment P126 493,185 452,371 446,535 Total Depreciation and amortization P126 526,702 484,135 470,712 6. Certain Balance Sheet Data As of 31 December (RMB in thousands) Reference Page 2008 2007 2006 Accumulated depreciation and amortization P105 1,559,019 1,535,554 1,426,743 Accounts payable P66 3,130,020 2,815,286 2,564,728 Accrued liabilities P66 1,539,754 1,113,454 840,059 Rent P99 1,171,046 994,695 792,676 7. Total assets of continuing operations The total assets of continuing operations is calculated as the net cash flow minus the cash outflow in financing activities, excluding payment of capital lease obligation and other financing activities, which may be regarded as expenditure in the P/L account (Wal-Mart, 2008). Similarly, in Lianhua, the total assets can be defined as the net cash flow from operating activities minus dividends paid, repayment of capital contribution and dividends paid to minority shareholders as follows: Reference Page 2008 2007 2006 Net cash inflow from operating activities P70 1,597,908 3,020,492 1,722,123 Less: Repayment of bank borrowings P70 0 0 (18,910) Dividends paid P70 (136,840) (81,913) (117,127) Repayment of capital contributions to minority shareholders P70 (4,000) (805) 0 Dividends paid to minority shareholders P70 (20,124) (31,042) (18,640) Total assets of continuing operations 1,436,944 2,906,732 1,567,446 8. According to Wal-Mart(2008), the average (including average total assets of continuing operations, average accumulated depreciation and amortization, average accounts payable and average accrued liabilities) is based on the addition of the account balance at the end of the current period to the account balance at the end of the prior period and dividing by 2. RMB Amount in thousands 2008 2007 Average total assets of continuing operations 2,171,838 2,237,089 Average accumulated depreciation and amortization 1,547,287 1,481,149 Average accounts payable (2,972,653) (2,690,007) Average accrued (1,326,604) (976,757) 9. The free cash flow is defined by Wal-Mart as net cash provided by operating activities of continuing operations in the period minus payments for property and equipment made in the period. In Wal-Mart's report, the net cash flow from operating activities actually deduct the interest, tax and capital lease obligations in the P/L account without any adjustments for actual payments. This manner is different from that in Lianhua and the adjustments are as follows: RMB Amount in thousands 2,008 2,007 2,006 Interest (P/L) 979 1,133 1,951 Interest paid (979) (1,133) (1,951) Adjustment 0 0 0 Income tax (P/L) 130,845 204,805 104,221 Income tax paid (194,251) (177,222) (114,908) Adjustment (63,406) 27,583 (10,687) There should also be adjustments for the minority interest. In Wal-Mart’s report, the net cash flow from operating activities has already deducted the minority interest but it only displays the figure in Incomes Statement in Lianhua’s report without deducting it. Reference Global Accounting Alliance Ltd (2009) Making Financial Reporting Simpler and Useful, the Way Forward [online] Available from [7 May 2010] Investopedia (2010) Investopedia explains Free Cash Flow. 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