Lecture 2 (chp 3 & 4)

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Western University *

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2310

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Industrial Engineering

Date

Oct 30, 2023

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docx

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Mos 2310 Finance Chapter 3 and 4 Sources and Uses of Cash SOURCES - Cash inflow- occurs when we sell something - Decrease in non-cash asset account - Increase in Liability - Increase in liability or equity account - Decrease in asset account USES - Cash outflow- occurs when we buy something - Increase in non-cash asset account - Decrease in liability - Increase in non-cash asset account Standardized Financial Statements - Common-size statements of financial position o Compute all accounts as a percent of total assets - Common-size statements of comprehensive income o Compute all line items as a percent of sales - Common-base-year financial statements o Express each line item as a multiple of the base year item Computing Liquidity Ratios - Current Ratio= CA/CL - Quick Ratio= (CA- Inventory)/CL - Cash Ratio= Cash/CL o Cash means cash + cash equivalents Computing Long-term Solvency Ratios - Recall= TA= TD + TE - Total Debt Ratio= (TA – TE)/ TA= TD/TA - Debt/Equity= TD/TE - Equity Multiplier= TA/TE= 1 + TD/TE Computing Coverage Ratios - Times Interest Earned= EBIT/Interest - Cash Coverage= (EBIT + Depreciation)/ Interest

Computing Inventory Ratios - Inventory Turnover= Cost of goods sold/ inventory - 365/ inventory turnover Computing Receivables Ratios - Receivables turnover= credit sales/accounts receivable - 365/receivables turnover Computing asset turnover - NWC turnover= sales/NWC - Fixed asset turnover= sales/NFA - Total asset turnover= sales/total asset Computing Profitability Measures - Profit Margin= Net Income/Sales - ROA= Net income/total assets - ROE= Net income/ total equity Computing market value measures - Earnings per share= Net income/ #of shares outstanding - PE ratio= Price per share/ earnings per share - PEG Ratio= pe ratio/expected earnings growth rate - Market-to-book ratio= market value per share/book value per share DU PONT IDENTITY - Provides deeper insight in how a company generates return on equity (ROE) - ROE= NI/TE - Can rearrange - ROE= NI/TA x TA/TE= ROA x EM - ROE= PM x TAT x EM - Profit margin is a measure of the firms operating efficiency (how well it controls cost) - Total asset turnover is a measure of the firm’s asset use efficiency (how well it manages its assets) - Equity Multiplier is a measure the firm’s financial leverage Ex. PM= 8.5% Total Asset Turnover= 1.6% ROE= 19.04 ROE= PM x TAT x EM EM= 1.4 (equity multiplier) EM= 1 + D/E (debt to equity ratio) D/E= 0.4

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