Financial Management of Sales Revenue- Finance
In this chapter we discuss Financial Management of Sales Revenue- Finance
Return on Assets
Net Income / Total Assets
The percentage of profit a company earns in relation to its overall resources
Return on Equity
Net Income / Total Equity
The amount of net income returned as a percentage of shareholders equity
Price – Earnings Ratio
Price Per Share / Earnings Per Share
Price-Sales Ratio
Price Per Share / Sales Per Share
Enterprise Value
Total Market Value of the Stock + Book Value of all Liabilities – CASH
DuPont Identity
Profit Martin (How well do they manage their costs)
x
Total Asset Turnover (How well do they manage their assets)
x
Equity Multiplier (Financial Leverage)
4 Determinants of Growth
-Profit Margin (operating efficiency)
-Total Asset Turnover (asset use efficiency)
-Financial Leverage (choice of optimal debt)
-Dividend Policy (how much to pay to shareholders vs. reinvesting in the firm)
5 Major Categories of Ratios
– Liquidity
– Solvency
– Efficiency
– Profitability
– Valuation
Problems with Financial Statement Analysis
Conglomerates
-No readily available comparables
Global competitors
Different accounting procedures
Different fiscal year ends
Differences in capital structure
Seasonal variations and one-time events
Inventory Turnover
Cost of Goods Sold / Inventory
A measure of the number of times inventory is sold or used in a time period such as a year
Days’ of Inventory
365 Days / Inventory Turnover
how long it takes a company to turn its inventory into money
Receivables Turnover
Sales / Accounts Receivable
Used to measure a firm’s effectiveness in extending credit as well as collecting debts
Payables Turnover
COGS / Accounts Payable
How quickly are they paying off their suppliers
Days’ of Receivables
365 Days / Receivables Turnover
The average number of days that a company takes to collect revenue after a sale has been made
Days’ of Payables
365 Days / Payable Turnover
The average number of days a company takes to pay its suppliers
Total Asset Turnover
Sales / Total Assets
The higher the ratio, the better it is, since it implies the company is generating more revenues per dollar of assets.
Cash Conversion Cycle (CCC)
Measures how long a firm will be deprived of cash if it increases its investment in resources in order to expand customer sales
Profit Margin
Net Income / Sales
Amount by which revenue from sales exceeds costs in a business
Operating Margin
Operating Income / Revenue
Proportion of a company’s revenue is left over after paying for variable costs of production such as wages, raw materials, etc
4 Basic Areas of Finance
Corporate Finance
Financial Institutions
Investments
International Finance
Financial Institutions
Companies that specialize in financial matters.
– Banks
– Brokerage Firms
– Insurance Companies
What is involved in the Investments side of Finance?
Stocks and Bonds
Valuing Financial Assets
Capital Budgeting Decision
What long-term investments should the business take on?
Capital Structure Decision
How should we pay for your assets?
Debt or Equity?
Working Capital Management Decision
How do we manage the day-to-day finances of the firm?
3 Forms of Business Organization
Sole Proprietorship
Partnership
Corporation
What is the Goal of Financial Management?
-Maximize the current value per share of the companies stock
– Maximize the value of the existing owners’ equity
What is the Agency Problem
Conflicts between the Principal (Stockholder) and Agent (Managers)
What is another name for Principal?
Stockholder
What is another name for Agent
Manager
What is the Balance Sheet? Snapshot of the firms Assets and Liabilities at any given point
4 Basic Areas of Finance
Corporate Finance
Financial Institutions
Investments
International Finance
Financial Institutions
Companies that specialize in financial matters.
– Banks
– Brokerage Firms
– Insurance Companies
What is involved in the Investments side of Finance?
Stocks and Bonds
Valuing Financial Assets
Capital Budgeting Decision
What long-term investments should the business take on?
Capital Structure Decision
How should we pay for your assets?
Debt or Equity?
Working Capital Management Decision
How do we manage the day-to-day finances of the firm?
3 Forms of Business Organization
Sole Proprietorship
Partnership
Corporation
What is the Goal of Financial Management?
-Maximize the current value per share of the companies stock
– Maximize the value of the existing owners’ equity
What is the Agency Problem
Conflicts between the Principal (Stockholder) and Agent (Managers)
What is another name for Principal?
Stockholder
What is another name for Agent
Manager
What is the Balance Sheet?
Snapshot of the firms Assets and Liabilities at any given point