course01 fınancıal management

course01 fınancıal management - Course 1: Evaluating...

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Unformatted text preview: Course 1: Evaluating Financial Course 1: Evaluating Financial Course 1: Evaluating Financial Course 1: Evaluating Financial Performance Performance Performance Performance Prepared by: Matt H. Evans, CPA, CMA, CFM This course provides a basic understanding of how to use ratio analysis for evaluating financial performance. This course is recommended for 2 hours of Continuing Professional Education. In order to receive credit, you will need to pass a multiple choice exam which is administered over the internet at www.exinfm.com/training A companion toll free course can be accessed using your touch tone phone. Dial 1-877-689-4097, press 3 for Voice on Demand and then press 754 for the quick toll free course. Revised March 5, 2000 Excellence in Financial Management Return on Equity Why use ratios? It has been said that you must measure what you expect to manage and accomplish. Without measurement, you have no reference to work with and thus, you tend to operate in the dark. One way of establishing references and managing the financial affairs of an organization is to use ratios. Ratios are simply relationships between two financial balances or financial calculations. These relationships establish our references so we can understand how well we are performing financially. Ratios also extend our traditional way of measuring financial performance; i.e. relying on financial statements. By applying ratios to a set of financial statements, we can better understand financial performance. Calculating Return on Equity For publicly traded companies, the relationship of earnings to equity or Return on Equity is of prime importance since management must provide a return for the money invested by shareholders. Return on Equity is a measure of how well management has used the capital invested by shareholders. Return on Equity tells us the percent returned for each dollar (or other monetary unit) invested by shareholders. Return on Equity is calculated by dividing Net Income by Average Shareholders Equity (including Retained Earnings). EXAMPLE — Net Income for the year was $ 60,000, total shareholder equity at the beginning of the year was $ 315,000 and ending shareholder equity for the year was $ 285,000. Return on Equity is calculated by dividing $ 60,000 by $ 300,000 (average shareholders equity which is $ 315,000 + $ 285,000 / 2). This gives us a Return on Equity of 20%. For each dollar invested by shareholders, 20% was returned in the form of earnings. SUMMARY — Return on Equity is one of the most widely used ratios for publicly traded companies. It measures how much return management was able to generate for the shareholders. The formula for calculating Return on Equity is: Net Income / Average Shareholders Equity Chapter 1 2 Components of Return on Equity Return on Equity has three ratio components. The three ratios that make up Return on Equity are: 1. Profit Margin = Net Income / Sales 2. Asset Turnover = Sales / Assets 3. Financial Leverage = Assets / Equity...
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course01 fınancıal management - Course 1: Evaluating...

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