Earned Ratio = EBIT/interest exp ~no days comp can op on its cash Asset Mgmt Ratios (Activity ratio, measure firm’s effectiveness in managing assets) Inventory Turnover = COGS/ Inventory No. times comp sold avg inv/year. Inv liquidity. Days’ Sales in Inventory = 365/ Turnover ↓btr. No days to sell all inv Receivable Turnover = Sales/ Receivables ↑btr. No times per year collect rec. Days’ Sales Outstanding (DSO) = AR/Avg Daily Sales = 365/ Rec Turnover ↓btr. DSO ↓: poor credit policy. Avg days aft sales to receive $ FA Turnover = Sales/NFA Effectiveness of asset to gen. sale TA Turnover = Sales/TA ↑btr. If FA> TA, prob w CA AP Turnover Times = COGS/AP Payable Deferral Period = 365/ AP Turnover Times Profitability ( Measure how well biz earns return on investments, show combined effect of liquidity, asset mgmt. & debts on operating results) Profit Margin = NI/Sales Measure firm op efficiency Basic Earning Power = EBIT/TA Remove tax/fin leverage effect Return on Assets (ROA) = NI/TA How efficient comp use A to get profit Return on Equity (ROE) = NI*/Total Common Equity *NI avail to common SH, need deduct preferred dividend Problems with ROE Doesn’t consider risk, focus on returns only. Doesn’t consider amt of capital invested May encourage managers to make investmt decisions that dont benefit SH Market Value Ratios
…..PV Factor P E = price per share earnings per share how much investor willing to pay for $1 of earnings An increase in stock’s required rate of return will lower P/E ratio M B = mkt price per share book value per share how much investor willing to pay for $1 book value equity. Du Pont Identity Links Profitability (ROE & ROA) and Efficiency (TA TO) ROE = net income ( ¿ ) total equity ( TE ) = ROA x EM (Equity Multiplier) = Profit margin x Total Asset turnover x EM PM operating efficiency (how well it controls cost) TA TO asset use efficiency (how well manages assets) EM financial leverage (eg. If ROE increase due to EM, provided firm is already well leveraged higher risk) Ratio limitations/problems - If firm operates in many divisions, industry avg comparison is difficult - Avg perf =/= good. Leader’s is better. Seasonal factors can distort ratios W3: Time value of Money Int / disc rate/cost of capital/opp cost of capital/reqrd return - Simple Int : FV = PV(n)(1+r) - Compound Int: FV n =PV(1+r) n Annuities (+ for inflow, - outflow) Ord annuity – same CF at end of each period (reg interval, stop date) eg. Bonds PV (Ord annuity) = PMT ∗ 1 − PV Factor r ¿ PMT ∗ 1 r ∗ ( 1 − 1 ( 1 + r ) n ) FV (Ord annuity) = PMT ∗ 1 r ∗[ ( 1 + r ) n − 1 ] Annuity due - cash flow at beg of each period eg. Rental <2 nd PMT, 2 nd ENTER> PV/FV Annuity Due = PV/FV Ordinary Annuity x (1+r) Growing Annuity Set of rates that grow at constant rate, g up to a certain maturity date. C1 = first cash payment Perpetuity – set of equal payments paid forever . Growing perpetuity – set of payments, grow at constant rate each prd, contd 4eva PV = C/r (C: periodic payment) Growing Perpetuities : PV= C 1 r − g [ 1 − ( 1 + g 1 + r ) n ] C n = C 1 x (1+g) n (r: discount rate, g: growth rate) Effective Annual Rate (EAR): actual rate paid/received aft considering any compounding that may occur during the yr. m = compounding frequency per yr EAR = [1+ APR m ] m -1 (in decimals) = (1+Period Rate) n -1 ** EAR/no. periods per yr =/= period rate
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