A Brief on Corporate Finance Ratios

2326 Words Feb 18th, 2012 10 Pages
economic risk+operational risk = business risk + financial risk = total firm’s risk

EVA = EBIT – TAX = the aftertax operating profit (sometimes referred to as net operating profit after taxes or NOPAT) * Less the dollar cost of the capital employed to finance these assets = COST OF CAPITAL

Invested Capital =
Cash +
Net fixed assets +
WCR (investment the firm must make to support its operating cycle is the sum of its inventories and accounts receivable minus its accounts payable)
WCR = (Accounts receivable + Inventories + Prepaid expenses) – (Accounts payable + Accrued expenses).
Cash-to-cash period = cash collected from customers – cash paid to suppliers

Matching strategy = match the lifetime of an asset with its
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oyed (ROCE) * ROIC can also be measured after tax by using EBIT (1 – tax rate) * Also called net operating profit after tax or NOPAT * Other measures of operating profitability include * Return on business assets (ROBA) * Return on total assets (ROTA)

Increase ROIC by * A higher operating profit margin is achieved by * Increasing sales through higher prices and/or higher volume—at a higher rate than operating expenses * Reducing operating expenses at a higher rate than sales * A higher capital turnover is achieved through a better use of the firm’s assets
Financial profitability * Financial cost ratio (FCR) * FCR = Earnings before tax EBIT * Times-interest-earned (TIE), or interest coverage, ratio * TIE = EBIT Interest expenses * Financial structure ratio or equity multiplier * FSR = Invested capital or net assets Owners’ equity * Other measures of financial leverage * Debt-to-equity ratio * Debt-to-invested capital ratio
Tax effect on ROE

ROE is the product of five ratios * Operating profit margin * Capital turnover * Financial cost ratio (together with foll = financial leverage multiplier) * Financial structure ratio * Tax effect ratio

Profitability with mk ratios * Earnings per share (EPS) * EPS = Earnings after tax # of shares outstanding * Price-to-earnings

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