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5 Cards in this Set
- Front
- Back
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Levers of Performance
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-the same for all companies from corner stores to multinational corporations.
-Highlights the means by which managers can influence return on equity. -Consists of three ratios -the profit margin -asset turnover -financial leverage |
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Return on Equity
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-widely used measure of company financial performance
-equals the product of the profit margin, asset turnover, and financial leverage. -is broadly similar across industries due to competition -suffers from three problems as a performance measure: a timing problem because business decisions are forward looking , while ROE is a backward-looking, one period measure.-a risk problem because financial decisions involve balancing risk against return, while ROE only measures return. -A value problem because owners are interested in return on the market value of their investment, while ROE measures return on the accounting book value, a problem that is not solved by measuring the return on the market value of equity. -Despite its problems can serve as a rough proxy for share price in measuring financial performance. |
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Profit Margin
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-summarizes income statement performance
-Measures the fraction of each sales dollar that makes its way to profits. |
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Asset Turnover
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-summarizes asset management performance.
-measures the value of sales generated per dollar invested in assets. -is control ratio in that it relates sales, or cost sales, to a specific asset or liability; other control ratios are -inventory turnover -collection period -days sales in cash. -payables period -fixed-asset turnover |
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Financial Leverage
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Summarizes the companys use of debt relative to equity financing
-adds to owners risk and is thus not something to be maximized. -is best measured in the form of coverage ratios that relate operating earning to the annual financial burden imposed by the debt. -is also measured using balance sheet ratios that relate debt to assets, measured using book or market values. |
