Finance CH 3 part 1

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Author:
Giovanni
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155980
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Finance CH 3 part 1
Updated:
2012-05-27 06:13:11
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Finance finance ratios
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First half of Chapter 3 from the finance book "Corporate Finance"
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  1. Current Ratio
    CA / CL
  2. Net Income
    The so called bottom-line. 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.
  3. EPS
    • Net income divided by the number of shares outstanding. It expresses net income on a per share basis.
    • EPS= (Net income)/ (Shares outstanding)
  4. EBITDA
    Earnings before interest expense, depreciation, and amortization.
  5. Financial ratios
    such ratios are ways of comparing and investigating the relationship between different pieces of financial information.
  6. 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
  7. 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
  8. Quick Ratio
    Quick Ratio= Current Assets-Inventory/ Current liabilities

    Relatively large inventory are a sign of trouble.
  9. Cash Ratio
    A short term creditor may be interested

    Cash ratio= Cash/ Current liabilities
  10. 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
  11. Total Debt Ratio
    it takes into account all debts of all maturities to all creditors.

    Total debt ratio= total assets-total equity/ total assets

    whether it's high or low depends on capital structure matters.
  12. Debt Equity Ratio
    Total Debt/ Total equity
  13. Equity Multiplier
    Total Assets/ Total equity
  14. Times interest Earned (TIE) Ratio
    TIE= EBIT/ Interest

    This ration measures how well a company has its interest obligations covered.
  15. 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
  16. 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
  17. 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
  18. Day's Sales in inventory
    Day's Sales in inventory = 365 days / Inventory turnover

    Ex: 365/ 3.2 = 114 days
  19. 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
  20. Total Assest Turnover
    Total Assets turnover = Sales / Total Assets
  21. 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
  22. Profit Margin
    Profit Margin = Net Income / Sales
  23. 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.
  24. Return on Assets
    • Return on Assets = Net income/ total assets
    • AKA ROA is a measure of profit per dollar of assets
  25. 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
  26. Market Value Measures
    • The market price per share of the stock
    • 1. Price-Earning Ratio
    • 2. Market to book Ratio
    • 3. Market Capitalization
    • 4. Enterprise Value Multiples



    EPS = Net Income / Shares outstanding
  27. 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.
  28. 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.
  29. Market Capitalization
    • capitalization of the public firm compared to the stock market price per share x shares outstanding.
    • PPSx Shares outstanding.
  30. 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
  31. 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

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