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9 Cards in this Set
- Front
- Back
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What are the ratios that measure overall profitability (all Financial statments)?
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Return on Equity, Return on Assets
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What are the ratios that measure efficiency or operating management?
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Accounts Receivable Turnover, Fixed Assets Turnover
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What are the ratios that measure how well liabilities are managed?
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Current Ratio, Operating Cash Flow Ratio
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What are the ratios that measure Financial Strategy?
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Debt to Equity,
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What are the profitability indicator ratios (income statement)?
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Profit Margin, Operations Margin
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What is the return on equity and interpret it.
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ROE = (net income - Preferred dividends)/Avg shareholders equity
OR ROE = Profitability x Efficiency x Leverage ROE = Net Income/Sales x Sales/Asset x Assets/Equity ROE gives an idea of net income generated for an average share. |
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What is the formula fo the four levels of profit margins and interpret each one.
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Gross Profit (Rev-COGS) Margin = Gross Profit/Net Sales
The amount of gross profit as a percentage of sales generated. This ratio will help understand how well management handles wages, raw materials and manufacturing related assets to generate profits. More important in a producer company as raw materials prices can be affected by the economy. Operating Profit Margin (Gross Profit - Operating Expenses) This ratio helps interpret whether management is exercising sufficient control over operating expenses such as Marketing, SGA, R+D, D+A. As Management has much greater contorl over operating expenses than Gross Profit so it is the preferred ratio for trend analysis. Pretax Profit Margin - This ratio is a better measure of actual profitability as more effective tax amangement techniques can create an illusion of greater profitability. Net Profit Margin - This ratio while important, does not account for management of expenses in terms of COGS or Operating Expenses. |
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What is the payback period?
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# years to be 'paid back' initial cost
Payback Period = Inital cost of project/annual cashflows Notw, if given earning, SAY that this is not cashflow, earnings are usually higher than cashflow for services businesses. |
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WHat is IRR and when should you accept a project?
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IRR method brings back all the future cashflows to the present value equivalent to inital cost. At this IRR, there will be no profit and if your target return is equal or lower than the IRR it means you will make no profit or a loss. If your target return is higher than IRR, the PV of CF's will be higher than inital cost, making a profit.
PV of future cash flows − Initial Investment = 0; or CF1 + CF2 + CF3 + ... − Initial Investment = 0 ( 1 + r )1 ( 1 + r )2 ( 1 + r )3 |
