Summary of Case 6: Thoughtful Forecaster 1. Understanding the Financial Relationships of the Business Enterprise:
Financial statements provide information of business’s financial activities in a period of time such as the income statement, profit and loss statement, and measures flows of costs, revenue, and profits. Thorough analysis of financial statements help the company understand the mechanics of the systems that make up business operation. 2. Interpreting Financial Ratios:
Financial ratios help the company identify and compare relationships across financial – statement line item. The comparison of ratios provides diagnostic tools for assessing the health of the various systems in the company. * Growth Rates:
Growth rates capture the year – on – year percentage change in a particular line item
Growth rates sales = (sales in this year – sales in previous years) / sales in previous years * Margins:
Margin ratios capture the percentage of revenue accounted for by profit or the percentage of revenue not consumed by business costs.
Gross margin = Gross Profit / Total revenue
Operating margin = Operating profit / Total revenue
Net Profit margin = Net income / Total revenue * Turnover:
Turnover ratios measure the productivity, or efficiency, of business assets. The turnover ratio is considered by dividing a related measure of volume from the income statement by a measure of investment from the balance sheet. Productivity or efficient assets produce high levels of asset turnover.
Receivable turnover = Total revenue / Account receivable
Inventory turnover = Cost of goods sold / Inventory
PPE turnover = Total revenue / Net property, plant, equipment
Asset turnover = Total revenue / Total assets
Total capital turnover = Total revenue / Total capital
Payable turnover = Cost of goods sold / Accounts payable
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