Financial Management of Sales Revenue- Finance

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


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