Session7 - Managing growth and Corporate Lending Flashcards
How do you break down the DuPont-model?
Profit Margin * Asset Turnover * Financial Leverage = ROE
Moreover,
(NI / Sales) * (Sales / Assets) * (Assets / equity) = ROE
If profit margin is decreasing and financial leverage is increasing, good or bad?
Probably bad.
In terms of risk, what does a high ROE imply?
A higher risk
How do you measure the asset turnover?
REV / TA or REV / FA
How do you measure the time it takes for inventories to stay in the firm?
INV / CGS * 365
How do you measure the Collection period?
AR / REV * 365
How do you measure the Payable period?
AP / REV * 365
How do you measure the day’s sales in Cash?
CASH / REV * 365
What does the collection period, the payable period and Cash days sales all have in common?
They measure the flow of the firms income or costs.
What is EBIT / Int?
It is to which extent we generate accounting “cash” to cover for interest
In terms of this course, what does NLB measure?
NLB measures to which extent the NWC is positive
What does the Leverage ratio measure?
the repartitation of the origin of external funds
What does the coverage ratios measure?
the amount of income available to a debt service
What does the liquidity ratios measure?
The capability of meeting short term needs
What does the current ratio measure?
Current assets / current liabilities
DOES NOT say anything about liquidity!
What is an acid test?
[Current Assets - Inventory] / Current liabilities
What is the main difference between Finance and Accounting?
Finance measures what will happen while Accounting measures what have happened.
What could be the problem when we see an Increasing WCR and decreasing NLB? How can it be solved?
Increasing WCR means that we sell more and more.
Decreasing NLB means that short term debt is increasing.
The company can solve this by:
1) Decrease the WCR by reducing AR days
2) Take on debt AS LONG AS it adds value to the firm.
What does NWC show?
to what extent we have long term resources to cover long term uses
What is a good link to use between NI and CASH?
To see to which extent that NI generates CASH: If NI increases more and more, does the cash follow or not?
If not, may have an issue.
What are the 2 formulas for WCR?
WCR = AP + INV - AR
or
WCR = (CA - CASH) - (CL - STD)
What could be bad with growth?
unmanagerial growth
Is a positive cash flow always good news?
NO! Cash = CF_OP + CF_INV + CF_FIN
Because there could be sources of financing that generates cash for instance which doesn’t show any sign of profitability
When the cash variation is positive over the year, it always means that the company creates value?
NO, it depends on where the cash flow variation is coming from
CF_OP could be negative while the other two are positive –> Cash is positive. However, doesn’t mean that the firm is profitable.
