1. Intro to Financial Management
Evaluating a Firm’s Financial Performance

2. Review Homework What is on an income statement?
What is common-sized?
What are gross profit margin, operating profit margin, net profit margin, earnings, and earnings per share?
What do these terms tell you?
What is on a balance sheet?
What are book value, working capital, debt and leverage ratios?
What is on a cash flow statement?
What is free cash flow?
What are the three major areas of cash flow?
What are the basics of computing corporate taxes?

3. Review What are spot and future markets? What is a spread?
What are nominal rates?
What are real rates?
What types of risk are involved in interest rates?
What is liquidity?
What is the Yield Curve?

4. Managing a Firm You can’t manage what you don’t measure.
Firm performance
Liquidity
Management performance
Change in shareholder value
Financial ratios used to compare firms
Deals with different sized firms
Can compare with industry averages
Each industry may be different

5. Liquidity Ratios Does firm have the cash it needs?
Current ratio
= curr. assets / curr. liab.
Acid test (quick ratio)
= (cash + receivables) / curr. liab.
Inventory turnover ratio
= COGS / inventory
Know the calculations
Know what these ratios tell you!

6. Liquidity Ratios Measuring Risk
Debt ratio
= Liabilities / Assets
Leverage ratio
= Assets / Owners’ Equity
Both are used to assess the risk from using borrowed money
Borrowed money magnifies profits. How?
Borrowed money also magnifies losses. How?
Leverage in the news

7. Management Ratios How well are the operations managed?
Return on sales (ROS)
= net income / sales
Return on assets (ROA)
= net income / assets
Inventory turnover ratio
= COGS / inventory
Know the calculations
Know what these ratios tell you!

8. Management Ratios Is management providing good returns and value?
Return on equity (ROE)
= net income / equity
Price/earnings ratio
= price per share / earnings per sharePrice/book ratio
= market price per share / book value per share
> 1 means creating value, <1 means losing value
Know the calculations
Know what these ratios tell you!