COMM 300: Financial Health Exam

From BluWiki

Big principal

• Risk vs. Return
  • Is the risk worth the return?

• Risk and return are two sides of the same coin
  • To increase wealth, you can increase return or decrease risk.

What you want to use to calculate financial health

• Financial statements
• Industry characteristics
• Economic conditions

Aspects of Financial Health

• Profitability - is the firm making money?
• Activity - is the firm using its resources efficiently?
• Liquidity - is the firm likely to fail in the short term?
  • The ability to convert an asset into cash without significant loss in value
• Debt management - Is the firm in financial straits or should it be taking on more risk?
• Market Sentiment - How is the market assessing firm performance?

Ratios

Profitability Ratios

• Find them at KMPS, pp. 109-110, 115 - 117
• Important ratios:
  • Gross profit margin
  • Operating profit margin
  • Net profit margin
  • Return on assets
  • Return on equity

Earnings ratios

• Forrestor pg. 37?
• Important ratio:
  • Earnings / share

Activity ratios

• See Higgins pp. 36-40; RWJ, pp. 35-36; KPMS, pp. 107-108, 111-112
• Important ratios
  • Total asset turnover
  • Fixed assets turnover
  • Inventory turnover
  • Average collection period

Liquidity ratios

• See Foerster, pp. 44-45; KPMS, p. 106
• Important ratios:
  • Current ratio
  • Quick ratio

Debt ratios

• See Foerster, pp. 45-46; KPMS, pp. 113-114
• Important ratios:
  • Total debt ratio
  • Long term debt ratio
  • LT Debt / equity

Coverage ratios

• See Foerster, p. 46; KPMS, p. 114
• Important ratios:
  • Times interest earned
  • Fixed charges coverage

Market sentiment ratios

• See Higgins, p 50-52; RWJ p 39-41; KPMS, pp 119-120
• Important ratios:
  • Price/earnings ratio
    • What investors are willing to pay for a dollar of current earnings
  • Market/book ratio
    • You want it to be greater than 1
  • Book value / share
    • Accounting measure of value

duPont Analysis

• See KPMS pp. 116-117 (odd exposition)

• ROA = (Net Income / Sales) x (Sales / Total Assets)
• ROE = ROA x Equity multiplier
• ROE = (Net profit margin) x (Total asset turnover) x (Equity multiplier)
• ROE = (Net Income / Sales) x (Sales / Total Assets) x