Mmi finance 2


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Mmi finance 2

  1. 1. Chapter II Financial performances evaluation
  2. 2. <ul><ul><ul><ul><li>Net income </li></ul></ul></ul></ul><ul><li>Return on Equity (ROE) = </li></ul><ul><li>Shareholder’s Equity </li></ul><ul><li>It measures the efficiency with wich a company employs owner’s capital </li></ul><ul><li>Indicates the annual % return on each $ of owner's equity invested in the company </li></ul><ul><li>Rewrite: </li></ul><ul><li>Net income Sales Assets </li></ul><ul><li>ROE= x x </li></ul><ul><li>Sales Assets Shareholder’s Equity </li></ul><ul><li>Debriefing: management has only 3 levers for controlling ROE </li></ul><ul><li>Earnings squeezed out of each dollar of sale = proffit margin </li></ul><ul><li>Sales generated from assets employed = asset turnover </li></ul><ul><li>Amount of equity used to finance the assets = financial leverage </li></ul>Financial performance ratios - Profitability 1 2 3
  3. 3. <ul><ul><li> EBIT </li></ul></ul><ul><li>Return on capital employed (ROCE) = </li></ul><ul><li> Capital employed </li></ul><ul><li>Capital employed = Long term liabilities + Shareholder's equity. </li></ul><ul><li>Annual return on each $ invested in the company by shareholders and debtors </li></ul><ul><li>How well a company is using the capital to generate revenues. </li></ul>Financial performance ratios- Profitability
  4. 4. <ul><ul><li>Return on Assets (ROA) is a basic measure of the efficiency with which a company allocates and manages its resources; it measures profit as a percentage oh money provided by owners and creditors </li></ul></ul><ul><li> </li></ul><ul><ul><ul><ul><li>Net income </li></ul></ul></ul></ul><ul><ul><ul><li>Return on Assets (ROA) = </li></ul></ul></ul><ul><ul><ul><li>Total assets </li></ul></ul></ul>Financial performance ratios - Profitability
  5. 5. <ul><li>Profit margin measures the fractin of each $ of sales that trickles down through the income statement to profits ; it reflects company’spricing strategy and its ability to control operating costs </li></ul><ul><ul><ul><ul><li>Sales - Cost of Sales </li></ul></ul></ul></ul><ul><li>Gross Profit margin (%) = </li></ul><ul><ul><ul><li>Sales </li></ul></ul></ul><ul><li>The gross profit margin must cover all other costs </li></ul><ul><ul><ul><ul><li>Profit After Tax (PAT) </li></ul></ul></ul></ul><ul><li>Net Profit margin (%) = </li></ul><ul><ul><ul><li>Sales </li></ul></ul></ul><ul><li>The proportion of each $ of sale the firm retains as profit after all expenses including taxes </li></ul>Financial performance ratios - Profitability
  6. 6. <ul><ul><li>Return on investment (ROI) is the annual percentage return from each $ of capital invested in the business by creditors and shareholders. </li></ul></ul><ul><li> </li></ul><ul><ul><ul><ul><li>Profit After Tax (PAT) </li></ul></ul></ul></ul><ul><ul><ul><li>Return on investment (ROI) = </li></ul></ul></ul><ul><ul><ul><li>Total assets </li></ul></ul></ul>Financial performance ratios - Profitability
  7. 7. <ul><li>Company debt capacity is the liquidity of its assets. An asset is liquid if it can be readily converted to cash. A liability is liquid if it must be repaid in the near future. </li></ul><ul><li>Current Assets </li></ul><ul><li>Current ratio = </li></ul><ul><li>Current Liabilities </li></ul><ul><li>A company with a low current ratio lacks liquidity and canot reduce its current assets for cash to meet its obligation. It must rely instead on operating income and outside financing. </li></ul>Financial performance ratios - Liquidity
  8. 8. <ul><ul><li> Current assets - Inventory </li></ul></ul><ul><li>Quick (acid) ratio = </li></ul><ul><li>Current Liabilities </li></ul><ul><li>Inventory is not very liquid, because the cash cycle may be long </li></ul><ul><li>Under distress conditions, a company or its creditors may realize little cash from the sale of inventory (sellers tipicaly receive 40% or less of the book value) </li></ul>Financial performance ratios - Liquidity
  9. 9. <ul><ul><li>Accounts receivable </li></ul></ul><ul><li>Collection period = x 365 </li></ul><ul><li>Sales </li></ul><ul><li>Long collection period may indicate problems with credit quality or credit granting procedures. </li></ul><ul><ul><li> Inventory </li></ul></ul><ul><li>Inventory days = x 365 </li></ul><ul><li>Cost of sales </li></ul><ul><li>Shows how long the company hold inventory in stock before selling </li></ul><ul><ul><li> Trade payables </li></ul></ul><ul><li>Accounts payable period = x 365 </li></ul><ul><li>Purchases </li></ul><ul><li>Generally, the higher the better, but an increase may be a sign of lack of long term finance or poor management of current assets </li></ul>Financial performance ratios - Assets
  10. 10. <ul><ul><ul><ul><li>Sales </li></ul></ul></ul></ul><ul><ul><ul><li>Fixed assets Turnover = </li></ul></ul></ul><ul><ul><ul><li>Net fixed assets </li></ul></ul></ul><ul><li>Companies requiring large investments in long term assets are said to be capital intensive. Fixed assets turnover is a measurement of capital intensity </li></ul><ul><li>Indicates the number of $ of sales generated per $ of fixed assets </li></ul><ul><li>High ratio is usually preferred to a low ratio, but may indicate obsolete fixed assets </li></ul><ul><li>Ratio should be compared with the industry average </li></ul>Financial performance ratios - Assets
  11. 11. <ul><ul><li>Total Debt (Liabilities) </li></ul></ul><ul><li>Debt –to-equity = </li></ul><ul><li>Total Equity </li></ul><ul><li>A high ratio indicates that more of the company is financed by creditors (higher risk and lower profit available for shareholders) </li></ul><ul><ul><ul><ul><li> Total liabilities </li></ul></ul></ul></ul><ul><li>Debt-to-assets = </li></ul><ul><ul><ul><li>Total assets </li></ul></ul></ul><ul><li>Indicates the percentage of assets that are paid by creditors </li></ul>Financial performance ratios – Balance sheet
  12. 12. <ul><ul><ul><ul><li> EBIT </li></ul></ul></ul></ul><ul><li>Interest cover = </li></ul><ul><ul><ul><li>Interest paid </li></ul></ul></ul><ul><li>Indicates whether a company is earning enough profits to pay its interest </li></ul><ul><li>More specific, Interest cover shows how many times over the company earned its interest obligations </li></ul>Financial performance ratios – Coverage
  13. 13. <ul><ul><ul><ul><li>Net income </li></ul></ul></ul></ul><ul><li>Earning per Share (EPS) = </li></ul><ul><li>Average Number of ordinary shares </li></ul><ul><ul><li> Market price per share </li></ul></ul><ul><li>P/E (price to earning) = </li></ul><ul><li>EPS </li></ul><ul><li>Indicates how much the market is wiling to pay for each $1 of company earning </li></ul><ul><li>A high number suggest the company has excellent growth prospects or is very low risk </li></ul><ul><li>In general, P/E ratio indicates what investors belive about the future prospects; sometimes the earnings are weak, but investors belive the weakness is temporary </li></ul>Financial performance ratios – Investor
  14. 14. <ul><li> EPS </li></ul><ul><li>Dividend cover = </li></ul><ul><li>Dividend per share </li></ul><ul><li>Proportion of profit for the year that is available for distribution to shareholders </li></ul><ul><ul><ul><ul><li>Dividend per share </li></ul></ul></ul></ul><ul><li>Dividend yield = </li></ul><ul><ul><ul><li>Market Price per Share </li></ul></ul></ul><ul><li>It is the return a shareholder is currently expecting on the share of a company </li></ul><ul><ul><li> Dividend per share </li></ul></ul><ul><li>Dividend payout = </li></ul><ul><ul><ul><li>EPS </li></ul></ul></ul><ul><li>Indicates the percentage of each $1 of net income that is paid out to its shareholders in the form of a dividend </li></ul><ul><li>High growth companies have a low dividend payout ratios. </li></ul>Financial performance ratios – Investor