Finance CH 3 part 1
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Net Income
The so called bottomline. Defined as total revenue minus total expenses Shareholders look closely at Net income because dividend payout and retained earnings are closely linked to net income.

EPS
 Net income divided by the number of shares outstanding. It expresses net income on a per share basis.
 EPS= (Net income)/ (Shares outstanding)

EBITDA
Earnings before interest expense, depreciation, and amortization.

Financial ratios
such ratios are ways of comparing and investigating the relationship between different pieces of financial information.

Short term solvency or liquidity measures
 intended to provide information about a companies liquidity. Primary concern to see if a business can pay its bills in the short run w/o stress. The focus on current assets and current liabilities
 1. Current Ratio
 2. Quick (or acid test) ratio
 3. Cash ratio

Current Ratio
One of the best known and widely used
Current ratio= current assets/ current liabilities
to a firm, a high current ratio indicates liquidity, but it also may indicate inefficient use of cash and short term assests.
We expect a current ratio of a least 1

Quick Ratio
Quick Ratio= Current AssetsInventory/ Current liabilities
Relatively large inventory are a sign of trouble.

Cash Ratio
A short term creditor may be interested
Cash ratio= Cash/ Current liabilities

Long Term Solvency Measures
 Intended to address its long run ability to to meet its obligations or more generally its financial leverage. Some times called financial leverage ratios.
 1. Total Debt Ratio
 2. Time interest Earned
 3. Cash Coverage

Total Debt Ratio
it takes into account all debts of all maturities to all creditors.
Total debt ratio= total assetstotal equity/ total assets
whether it's high or low depends on capital structure matters.

Debt Equity Ratio
Total Debt/ Total equity

Equity Multiplier
Total Assets/ Total equity

Times interest Earned (TIE) Ratio
TIE= EBIT/ Interest
This ration measures how well a company has its interest obligations covered.

Cash Coverage Ratio
The problem with TIE is that its covered to EBIT and its not a measure of cash to pay interest.
Cash Coverage Ratio= EBIT+ (Depreciation and amoratization) / Interest

Assets management or Turnover Measures
 Specific ratios used to interpret turnover. The describe how effiecient, or intensive a firm uses its assets to generate sales.
 1. Inventory Turnover and Day's Sales in Inventory
 2. Receivables Turnover and Day's sales receivables
 3. Total Assets Turnover

Inventory Turnover
Inventory Turnover = Cost of goods sold/ Inventory
when you get the number ex: 3.2, that mean 3.2 times during the year. Then apply this number to the day's sales inventory equation

Day's Sales in inventory
Day's Sales in inventory = 365 days / Inventory turnover
Ex: 365/ 3.2 = 114 days

Receivables Turnover and Day's sale Receivables
Receivables = Sales / Acccounts Receivables
 This is to see how fast a company can collect on a sale
 then use the Day's Sales in receivables
 365 days/ Receivables turnover

Total Assest Turnover
Total Assets turnover = Sales / Total Assets

Profitablity Measures
 Intended to measure how efficiently the firm uses it assets and how effeciently the firm mamages it operations.
 1. Profit Margin
 2. EBITDA Margin
 3. Return on Assets
 4. Return on Equity

Profit Margin
Profit Margin = Net Income / Sales

EBITDA Margin
EBITDA Margin = EBITDA/ Sales
looks more directly at operating cash flows than does net income and does not include the effect of capital structure or taxes.

Return on Assets
 Return on Assets = Net income/ total assets
 AKA ROA is a measure of profit per dollar of assets

Return on Equity
 ROE is a measure of how the srock holder fared druing the year. True bottom line measure of performance.
 Return on Equity = Net Income / Total Equity

Market Value Measures
 The market price per share of the stock
 1. PriceEarning Ratio
 2. Market to book Ratio
 3. Market Capitalization
 4. Enterprise Value Multiples
EPS = Net Income / Shares outstanding

Price Earning Ratio
PE Ratio= Price per share / Earnings per share
High PE ratios are often taken to mean that the firm has significant prospect for future growth.

Market to Book Ratio
 market to book ratio = market value per share/ book value per share
 book value reflects historical costs. Compares the market value of the firms investments to their cost.

Market Capitalization
 capitalization of the public firm compared to the stock market price per share x shares outstanding.
 PPSx Shares outstanding.

Enterprise Value
 Measure of the firms value that focuses on only the market value of outstanding shares of stock.
 EV = market capitalization + market value of interest bearing debt  cash

Enterprise Value Multiples
 is to estimate the value of the firms total business rather than just focusing on the value of its equity
 EV/ EBITDA