1-2. Financial and Non-Financial Measures of Performance Flashcards
(39 cards)
Ratio analysis: what are metrics?
- Profitability/return
- Asset utilization
- Liquidity
- Debt utilization
- Market ratios
Ratio analysis: Profitability/Return metrics? what are they used for?
*Gross Margin = Revenue - COSG
*Contribution Margin = Revenue - Variable costs
GM used for traditional external reporting.
CM used for planning purpose (internal).
Ratio analysis: Profitability/Return: Gross margin: List traditional IS from sales to EBIT and point manufacturing/non-manufacturing costs.
Sales (COGS) - Manufacturing cost =GM (SGA exp) - Non-manufacturing cost =EBIT
Ratio analysis: Profitability/Return: Contribution margin: List contribution IS from sales to EBIT and point variable/Fixed costs.
Sales (Variable) - variable costs =CM (Fixed) - fixed costs = EBIT
Ratio analysis: Operating and Net profit metrics? Useful for what?
*Operating profit margin (same as EBIT) = Operating income / Sales
Useful for determining comparable performance without considering potential interest/tax effects (have little to do with operation).
*Profit margin (=return on sales) = NI / Sales
Indicates an ability of revenue to general profits
Ratio analysis: Return on Investment metrics?
- ROI = NI / Total assets
* Return on Equity = NI / Common stockholders’ equity
Ratio analysis: DuPont approach to ROI?
DuPont = ROS x Asset turnover
ROS = NI / Sales
Asset turnover = Sales / Total assets
Ratio analysis: Residual Income?
RI = Operating income - (Required rate of return x Invested capital)
This is a general form of economic profit rather accounting profit.
Ratio analysis: Asset utilization metrics?
*Receivables turnover = Sales on account / Average accounts receivable
*Days’ sales in receivables = Days in year / Accounts receivable turnover
(Average AR / Average sales per day)
Indicate the length of collection period
- Inventory turnover = COGS / Average inventory
- Fixed asset turnover = Sales / Average net fixed asset
Ratio analysis: Liquidity metrics?
- Current ratio = Current assets / current liabilities
* Quick or Acid test ratio = (current assets - inventory) / current liabilities)
Ratio analysis: Debt utilization metrics?
- Debt to total assets = Total debt / Total assets
- Debt to equity = Total debt at the end/ Total owner’s equity at the end
- Time interest earned = Operating income / Interest expense
Ratio analysis: Market ratio metrics?
- Price earnings (PE) ratio = Market price per share / Earnings per share
- Market-to-Book ratio = Market value per share / Book value per share
- *Book value per share = Common stock owner’s equity / # of common shares outstanding
- Common stock owner’s equity = common stock + ending retained earning)
Risk management: what does managing risks involve?
- Identifying the different types of risk that are relevant to the company
- Identifying ways to mitigate or eliminate that risk to achieve acceptable levels of risk exposure
Risk management: what are 3 types of risks?
- Strategic risk: address LT broad-based exposure related to the overall strategy of the organization
- Operational risk: ST in nature and includes process risk, shared service risk, foreign/off shore risk, and credit/default risk
- Market risk: associated with economic events or natural disasters
Risk management: what are other risk management approaches?
- Structuring operating leverage to the company’s advantage
- Providing contingency planning for disaster recovery and business continuity
- Using hedging and diversification to offset exposure
- Using insurance for risk mitigation/elimination
- Evaluating the level of uncertainty when estimating future costs and revenues
Risk management: Operating leverage: explain the result when there are more variable costs or fixed costs?
More VC: reduces the risk of not breaking-even
More FC: increases the contribution margin on sales
Risk management: Operating leverage: what is one way to quickly change the dominant portion of risk type?
To lease assets rather than purchasing them and vice versa.
Risk management: Contingency planning: what are methods for managing disaster recovery?
- Safeguarding equipment
- Building in redundancy
- Backup procedures
- Insurance
Risk management: what is hedging used for?
To offset future uncertainty with options and futures contracts related to commodities, foreign currency, and other investment exposure to minimize price risk.
Risk management: what does diversification do?
Reduces general unsystematic and portfolio risk, but does not completely offset risk as hedging does.
Risk management: what is insurance used for? what is unique?
To decrease exposure to specific, known hazards.
Unique: it deals with pure risk (where there is only a risk of losing) as opposed to speculative risk where gain is also possible.
Risk management: what is involved in evaluating uncertainty?
Estimating future costs and revenues and maintaining cost control as risk management strategy.
Risk management: Evaluating uncertainty: what are methods related to?
- Cost avoidance strategies: attempts to increase revenue using organizational strategy
- Making distinctions between committed and discretionary costs for effective cost management
Risk management: what is diversifiable risk also called?
Unsystematic or portfolio risk.
