The document lists various financial ratios required for a corporate business finance assignment. It provides definitions and explanations of ratios that measure debt, profitability, valuation, liquidity, payout, yield, profitability and investment, working capital management, and weighted average cost of capital (WACC).
The document lists various financial ratios required for a corporate business finance assignment. It provides definitions and explanations of ratios that measure debt, profitability, valuation, liquidity, payout, yield, profitability and investment, working capital management, and weighted average cost of capital (WACC).
The document lists various financial ratios required for a corporate business finance assignment. It provides definitions and explanations of ratios that measure debt, profitability, valuation, liquidity, payout, yield, profitability and investment, working capital management, and weighted average cost of capital (WACC).
The document lists various financial ratios required for a corporate business finance assignment. It provides definitions and explanations of ratios that measure debt, profitability, valuation, liquidity, payout, yield, profitability and investment, working capital management, and weighted average cost of capital (WACC).
Assignment Supplement: List of Required Financial Ratios.
Debt Ratios:
• Times Interest Earned (TIE) TIE = EBIT / interest expense
measures company ability to pay off interest obligations on outstanding debt • Debt / (Debt + MV Equity)* market value of equity is same as market capitalization
Profitability: how efficiently a company manages its costs and generates profits from its operations.
• Gross Margin Gross: production cost relative to selling price of goods
• Net Margin Net: after deducting all expenses, including operating expenses, interest, taxes, and other costs. efficient in controlling not only its production costs (as reflected in the gross margin) but also its overall operational costs and financial obligations.
Valuation: P/E ratio = Price per Share / Eearnings per Share • PE Ratio* earnings per share = net income / No outstanding shares >> assess a company's value and compare it to other companies in the same industry or sector market / book ratio • M/B Ratio* >> how much investors are willing to pay per dollar of earnings > A high P/E ratio typically suggests that investors are expecting higher earnings > expecting growth/risk reduction in future book value AKA shareholder equity or net asset value = assets - liabilities M/B > 1 : investors are optimistic about the company's future prospects, growth potential, or intangible assets that are not reflected on the balance sheet. Liquidity:
• Current Ratio = current assets / current liabilities
indicates company's ability to short time liabilities with its assets >1 indicates more assets than liabilities = better liquidity but too high ration may indicate inefficiency in utilizing assets <1 difficulties to meet short-term financial obligations with current assets alone. Payout:
• Payout Ratio = Dividends paid/net income
• Total Payout Ratio = Dividends paid+cash from equity (repurchases) / net income
Yield: = dividend paid to shareholder per share / share price (total dividend / market cap) indicated return on investment in stocks to compare to other opportunities • Dividend Yield* but.. high yield may be caused by low price which may indicate issue/concern about company performance • Total Payout Yield* = (Dividens + buybacks) / market capitalization combines both dividends and share buybacks to assess the total amount returned to shareholders as a percentage of the company's market capitalization Profitability and Investment: = earnings after tax / invested capital • ROIC*** >> how effectively a company utilizes its invested capital to generate profits.
• Re-Investment Rate = retained earnings / net income
how much of the income the company is retaining (not paying as dividends) usually to re-invest >> indicate whether a company more into growing or paying owners/shareholders
Working Capital Management:
The Following four ratios should appear together in a table (only one year): days it takes us to get cash for sold goods, lower = effeciency in converting sale to cash • Days Sales Outstanding (DSO)* = receivable / revenue per day • Days on Hand (DOH)* average days it takes company to sell its goods = inventory / cost of goods per day • Days Payable* >> how efficiently a company manages its inventory >> low = faster inventory turnover rate, which may suggest effective inventory management, quick sales, and less risk of • Cash Conversion Cycle* obsolete inventory. inventory: goods a company holds for re-sale (ready or yet to be ready)
days payable = accounts payable / cost of goods per day
>> measure average days it takes company to pay its credits >> evaluating a company's liquidity, cash flow management, and supplier relationships. Companies can use DPO as part of their working capital management strategy to optimize cash flow while maintaining positive relationships with suppliers. - account payable: how much company owns to suppliers for good on credits (not paid yet)
Key: Cash Conversion Cycle = DSO + DOH - Days Payable *: Only one Cash conversion year Cycle: howrequired long it takes company to convert investment into cash flow >> A shorter cash conversion cycle indicates that a company is more efficient in managing its working capital and converting its ***:into investments Significant interpretation cash. It signifies and faster cash subjective flows and better analysis liquidity. Awill also longer beconversion cash requested.cycle might indicate inefficiencies in managing inventory, collecting receivables, or paying suppliers, which can tie up cash and impact a company's liquidity.
WACC Cost of Capital
cost (how much) required for a company to finance its operations and growth (investment) >> estimate if an investment opportunity is good and compare to other opportunities
WACC = E/(E+D) x Re + D/(E+D) x Rd x (1-T)
Re (cost of equity) : funds needed by shareholders to invest in company stocks Rd (cost of debt) : interest in debt (loans and bonds)
Re = Rf + B * (Rm-Rf) Beta indicates less asset volatility than market and probable stability
Revenue: income from sales/services Profit: gain from revenue after deducting expense of goods Gross = revenue - cost of goods Operating = gross - operating cost Net profit/income = operating - other expenses (taxes, interest, depreciation, etc)
Key:
*: Only one year required
***: Significant interpretation and subjective analysis will also be requested.
