International Financial Management - Lecture 6
Lecture 6 - financial statements and ratio analysis
Lecture 6 - financial statements and ratio analysis
Fichier Détails
| Cartes-fiches | 54 |
|---|---|
| Langue | English |
| Catégorie | Finances |
| Niveau | Université |
| Crée / Actualisé | 13.01.2022 / 21.01.2022 |
| Lien de web |
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What are turnover measures?
Turnover (or asset management) measures describe how efficiently, or intensively, a firm uses its assets to generate sales
How do you calculate inventory turnover?
- You first need to consider the cost of goods sold, which is defined as the direct cost of earning the company's main revenue during this year
- the costs should include: materials used, labor costs, managerial salaries
- depreciation is included only if it is being charged on assets directly related to the main revenue stream
- Inventory turnover = costs of goods sold / inventory
- normally, the higher this ratio is, the more efficient the company is at managing inventory
What is days sales in inventory?
- If we know our inventory turnover, we can then figureout how long it took us to turn it over on average
- Days' sales in inventory = 365 days / inventory turnover
- this tells us how long inventory sits before being sold
- inventory is only appropriate in companies with real inventories
What are receivables turnover and days' sales in receivables?
- inventory measures give us some indication of how fast products can be sold
- with these other measurements, we look at how fast we collect on those sales
- receivables turnover = sales / trade receivables
- this ratio makes more sense if converted to days, thus:
- days' sales in receivables = 365 days / receivables turnover
- this ratio is frequently called the average collection period (ACP)
How can we interpret receivables turonver and days' sales in receivables?
- The result givcen my receivables turnover can be interpreted as the amount of times the money was collected and lent again
- once converted into days, it tells us how long the company takes to collect its credit sales
- "this company has 4.3 days' worth of sales currently uncollected"
What is the total asset turnover ratio?
- Total asset turnover = Sales / Total assets
- for every euro in assets, the company generates x times in sales
- if the result is 0.36, this means for every euro in assets, the company generates 0.35 times in sales
What are profitability measures?
Profitability measures are intended to meausre how efficiently the firm uses its assets, and how efficiently the firm manages its operations, where the focus lines on net income
What is profit margin?
- Profit margin is an important profitability measure
- profit margin = net income / sales
- all other things equal, a relatively high profit margin is obviously desirable, because this corresponds to low expense ratios relative to sales
What is return on assets?
- It is a measure of profit per asset value
- Return on assets = net income / total assets
- Let's say the result of return on assets = 8%
- this means that the company, in an accounting sense, generates nearly 8 cents in profit for every euro in total assets
What is return on equity?
- It is a profitability measure
- it is a measure of how the shareholders fared during the year
- it is the true bottom-line measure of performance
- return on equity = net income / total equity
- ROA and ROE are both accounting rates of return
- also called return on book assets and return on book equity
- ROE = (Net income / total equity) x (Assets / Assets) x (Sales / Sales)
What is the Du Pont identity?
- When you decompose the ROE formula into:
- profit margin x total asset turnover x equity multiplier
What factors does the Du Pont identity consider to affect the ROE?
- Operating efficiency (measured by profit margin)
- Asset use efficiency (measured by total asset turnover)
- Financial leverage (measured by equity multiplier)
What is the price-earnings ratio?
- This ratio is based on information, not necessarily contained in financial statements
- it is based on the share price
- these measures can only be calculated directly for publicly traded companies
- P/E Ratio = Price per share / Earnings per share
- The P/E Ratio measues how much investors are willing to pay per unit of current earnings
What is the market-to-book ratio?
- Market to book ratio = market value per share / book value per share
- Book value per share is total equity divided by the total number of shares outstanding
- A value of less than 1 could mean that the firm has not been successful overall in creating value for its shareholders
