Economic Value On A Risk Adjusted Basis Essay
This is the bottom-line contribution on a risk-adjusted basis and helps management to make effective, timely, decisions to expand business that increase the firm’s economic value and to implement corrective actions in those that are destroying its value. It is determined by deducting the operating capital cost from the net income. Companies set economic value contributions and improve the resource allocation process.
3. Asset Management
This calls for the efficient management of current assets (cash, receivables, inventory) and current liabilities (payables, accruals) turnovers and the enhanced management of its working capital and cash conversion cycle. Companies must utilize this practice when their operating performance falls behind industry benchmarks or benchmarked companies.
4. Financing Decision and Capital Structure
Here, financing is limited to the optimal capital structure (debt ratio or leverage), which is the level that minimizes the firm’s cost of capital. This optimal capital structure determines the firm’s reserve borrowing capacity (short-and long-term) and the risk of potential financial distress. Companies establish this structure when their cost of capital rises above that of direct competitors and there is a lack of new investments.
5. Profitability Ratios
This is a measure of the operational efficiency of a firm. Profitability ratios indicate inefficient areas that require corrective actions by management; they measure…