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The foundation of the Financial Equation is: Income = Revenue However, in order to perform this equation, we must first calculate
Revenue (Price x Volume) and Cost (Fixed + Variable). It is theref
the job of financial managers (and all management) to concern
themselves with revenues, costs and profits. Though emphasis from
department to department may vary, management must concern
themselves with all three. Generally speaking, both revenues and p
must increase over the medium and long terms while costs most o
must be maintained or decreased over the same period.
Income Statement
Statement of Shareholders
Equity
Balance Sheet
Liquidity Ratios
whether a company has enough short term assets to cover its short
debt. Anything below 1 indicates negative W/C (working capital).
While anything over 2 means that the company is not investing ex
assets. Most believe that a ratio between 1.2 and 2.0 is sufficient.A
known as "net working capital".
Debt Ratios
The debt ratio is the ratio of total debt to total assets, expressed in
percentage, and can be interpreted as the proportion of a company
assets that are financed by debt.The higher this ratio, the more
leveraged the company and the greater its financial risk. Debt ratio
vary widely across industries.ash for its sale. Thus, this metric add
average days in inventory to average days of accounts receivable t
arrive at a final number (of days) that combines the two.
Accounts Receivable
Collection Period
A/R Turnover
Inventory Turnover
A/P Turnover
Inventory to cash days calculates the total average days from recei
inventory to receiving cash for its sale. Thus, this metric adds aver
days in inventory to average days of accounts receivable to arrive
final number (of days) that combines the two.
The assets of the company are comprised of both debt and equity.
of these types of financing are used to fund the operations of the
company. The ROA figure gives investors an idea of how effective
the company is converting the money it has to invest into net incom
The higher the ROA number, the better, because the company is ea
more money on less investment. For example, if one company has
income of $1 million and total assets of $5 million, its ROA is 20%
however, if another company earns the same amount but has total
of $10 million, it has an ROA of 10%. Based on this example, the
company is better at converting its investment into profit. When yo
really think about it, management's most important job is to make
choices in allocating its resources. Anybody can make a profit by
throwing a ton of money at a problem, but very few managers exc
making large profits with little investment.
Profitability Ratios
Return on Investment
(ROI)
Sales Growth %
Expenses to Revenues
This ratio can be performed for total expenses or for a specific exp
account
This ratio can be performed for total expenses or for a specific exp
Asset Management
Ratios
Debt Ratio
account
DuPont Pyramid
Company/Investment
Valuation
The the sum of declared dividends for every ordinary share issued
Dividend per share (DPS) is the total dividends paid out over an en
year (including interim dividends but not including special dividen
divided by the number of outstanding ordinary shares issued. Divi
per share are usually easily found on quote pages as the dividend p
in the most recent quarter which is then used to calculate the divid
yield. Dividends over the entire year (not including any special
dividends) must be added together for a proper calculation of DPS
including interim dividends. Special dividends are dividends whic
only expected to be issued once so are not included. The total num
of ordinary shares outstanding is sometimes calculated using the
weighted average over the reporting period. For example: ABC
company paid a total of $237,000 in dividends over the last year o
which there was a special one time dividend totalling $59,250. AB
2 million shares outstanding so its DPS would be ($237,000$59,250)/2,000,000 = $0.0889 per share.
(Excel Function)
The difference between the present value of cash inflows and the
present value of cash outflows. NPV is used in capital budgeting t
analyze the profitability of an investment or project. Determining
value of a project is challenging because there are different ways t
measure the value of future cash flows. Because of the time value
money, a dollar earned in the future wont be worth as much as on
earned today. The discount rate in the NPV formula is a way to acc
for this. Companies have different ways of identifying the discoun
although a common method is using the expected return of other
investment choices with a similar level of risk.
(Excel Function)
The discount rate often used in capital budgeting that makes the ne
present value of all cash flows from a particular project equal to ze
Generally speaking, the higher a project's internal rate of return, th
more desirable it is to undertake the project. As such, IRR can be u
to rank several prospective projects a firm is considering. Assumin
other factors are equal among the various projects, the project with
highest IRR would probably be considered the best and undertake
first.You can think of IRR as the rate of growth a project is expect
generate. While the actual rate of return that a given project ends u
generating will often differ from its estimated IRR rate, a project w
substantially higher IRR value than other available options would
provide a much better chance of strong growth. IRRs can also be
compared against prevailing rates of return in the securities marke
firm can't find any projects with IRRs greater than the returns that
be generated in the financial markets, it may simply choose to inve
retained earnings into the market.
Where:
Re = cost of equity
Rd = cost of debt
V=E+D
D/V = percentage of