FM Function Flashcards
Commercial obj
Market share, growth etc
Financial
Shareholder wealth, profit maximisation etc
Earnings per share growth
It can be very difficult to judge whether a company has maximised its shareholders’ wealth or
maximised its long-term profitability, so the word ‘maximised’ will often be replaced with the word
‘increased’. One way of judging whether there has been an increase is to see if earnings per share have
grown. These earnings can either be used to pay a dividend or to reinvest to create capital growth.
Return on Capital
Employed (ROCE)
PBIT / TALCL
Measures efficiency in generating profits from all
capital employed (by both lenders + shareholders)
Return on
Shareholder Funds
Earnings / Shareholder Funds
Measures efficiency in generating earnings for
shareholders from capital they have contributed
Asset turnover
Revenue / TALCL
Measure how efficiently a company uses its assets
to generate sales
Total Shareholder
Return
Divi + change in price / Price at start of year
Measures the total return on investment (based on
income and capital growth) for shareholders
Dividend Yield
Dividends per share / Share Price
If you purchased a share today, what % income
return would you expect on your investment?
Earnings per share
(EPS)
PAT / Number of shares
The amount of earnings the company has generated
for the shareholders on each share they hold.
P/E Ratio
Share Price / EPS
What is the market’s view of our future growth? A
high P/E ratio suggests high predicted growth
Debt:Equity Ratio
Long term debt / Equity
What proportion of assets are funded by lenders vs
shareholders (use market values if available)
Gearing
Long term debt / Equity + long term debt
What proportion of assets are funded by lenders vs
shareholders (use market values if available)
Operational Gearing
Contribution / PBIT
or
Fixed Costs / Total Costs
To what extent are our costs fixed vs. variable?
The three E’s
VFM Assessment
Economy – cost of resources used. Are we getting the best value for the lowest cost?
Efficiency – outputs vs. inputs
Effectiveness – achieving targets
