ASSESSMENT OF PERFORMANCE MEASUREMENT IN BUSINESS STRATEGY ...
Assessment of Business Performance
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Transcript of Assessment of Business Performance
8/12/2019 Assessment of Business Performance
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Financial Analysis
Chapter 3
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A ratio converts financial information to a percentage, oneapproach to standardization
Each ratio provides a somewhat different analysis
Liquidity—cash, working capital & cash flowrelated
Activity—turnover ratios as possible efficiency
measures
Leverage—debt & solvency analysis
Performance (or profitability)—bottom line or
earnings related
Ratios for the most recent period are usually the mostimportant
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Importance Illustrates trends and patterns
Limitations Based on past data and conditions from which it
might be difficult to extrapolate future expectations Relative size is ignored (e.g., both large & small firms
can be compared) It is assumed that all numbers used are correct
(consider both possible errors and earningsmanagement)
If the numbers are not reliable, ratios are notparticularly useful
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Managers To assess the efficiency and profitability of operations To judge how effectively resources of the business are
being used
Owners The way company’s earnings are used and distributed The relative value of shares within the security markets
Lenders & Creditors Concerned about the company’s liquidity and cash flow
that affects its ability to make interest payments due themand eventually to repay the principal payment.
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Operational analysis CGS Ratio(cost of sales/total sales) Gross Margin (gross profit/ total sales) Profit Margin (NI/total Sales) EBIT Margin (EBIT/total Sales)
EBITDA Margin [(EBIT+D+A)/total Sales] NOPAT Margin [Operating Income*(1-tax rate)/total sales] Operating expense analysis (expense/total sales) Contribution Analysis [(sales-direct cost)/total sales]
Resource management Asset turnover (Sales/total assets)
Working capital management▪ Inventory turnover (sales/avg. inventory)
▪ Receivable turnover(sales/receivables)▪ Payable turnover (sales/payables )▪ Average days inventory in stock: 365/inventory turnover▪ Average days receivables outstanding: 365/receivables turnover▪ Average days payable outstanding: 365/payables turnover▪ Length of operating cycle: average days inventory + average days receivables
Profitability ROA (NI/Total assets)
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Investment return ROE (NI/OE) EPS (Net profit to common equity/# of shares
outstanding)
Disposition of earnings Dividend yield (dividend per share/ price per share) Payout ratio (cash dividend per share/ EPS)
Market indicators Earnings multiple (share price/EPS) Value of firm
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Liquidity Current ratio (current assets/current liabilities) Acid test ratio [(cash+cash equivalents+A/R)/current
liabilities] Financial leverage
Debt to assets ratio (Total debt/total assets) Debt to capitalization (LTD/net assets)
Debt to equity ratio (total debt/OE)
Debt services Interest coverage (EBIT/interest expense)
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By analyzing each of the three levers thatleads to Return on Equity – ROE:
Profitability of the operations How efficient assets are being made to work
Leverage ( the right mix of Equity to Debt)
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A way of visualizing the information so thateveryone can see it
Is a good tool for getting people started inunderstanding how they can have an impacton results
Helps to identify sources of strength andweakness in current performance
Helps to focus attention on value drivers
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Profit Margin Total Asset Turnover
ROA Equity Multiplier
ROE
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a. How the firm stands on aspecific date.
b. What BW owned.c. Amounts owed bycustomers.
d. Future expense itemsalready paid.
e. Cash/likely convertible tocash within 1 year.
f. Original amount paid. g. Acc. deductions for wear and
tear.
Cash and C.E. $ 90 Acct. Rec.c
394
Inventories 696Prepaid Exp d 5Accum Tax Prepay 10
Current Assetse $1,195Fixed Assets (@Cost)f 1030 Less:
Acc. Depr.g
(329) NetFix. Assets $ 701 Investment, LT 50 Other Assets, LT 223 Total Assets b $2,169
Basket Wonders Balance Sheet (thousands) Dec. 31, 2003a
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a. Assets = Liabilities + Equity.b. What BW owed and
ownership position.c. Owed to suppliers for goodsand services.
d. Unpaid wages,salaries,taxes etc.
e. Debts payable < 1 year. f. Debts payable > 1 year. g. Original investment.h. Earnings reinvested.
Notes Payable $ 290 Acct.Payablec 94 Accrued
Taxes d
16 Other AccruedLiab. d 100Current Liab. e $ 500
Long-Term Debt f 530 Shareholders’ Equity
Com. Stock ($1 par) g
200 Add Pdin Capital g 729 RetainedEarnings h 210 Total Equity $1,139
Total Liab/Equitya,b $2,169
Basket Wonders Balance Sheet (thousands) Dec. 31, 2003
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a. Measures profitability over a
time period.b. the cost of the units that
was sold to customers
c. Sales comm., adv., officers’salaries, etc.
d. Operating income.
e. Cost of borrowed funds.
f. Taxable income.
g. Amount earned for
shareholders.
Net Sales $ 2,211
Cost of Goods Sold b
1,599 GrossProfit $ 612 SG&A Expenses c
402 EBITd $210 Interest Expensee 59
EBT f $ 151Income Taxes 60 EATg
$ 91 CashDividends 38 Increasein RE $ 53
Basket Wonders Income Statement (in thousands) for Year Ending December 31, 2003a