BA 101 Lecture Notes - Lecture 11: Current Asset, Current Liability, Accounts Payable
30 May 2018
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Business 101 – Lecture 11 – Performance Measures
- Ratios are performance measures
o Balance sheet
o Income statement
Business Operations
• Return on Sales ROS (Net Income / Sales)
o How much of your sales dollar is profit?
o ROS measures efficiency of operations
o When it increases, it means that your company is doing well
o Compare your ROS to previous sales and then compare to other companies’
averages
o To increase ROS decrease variable / period costs
• Asset Turnover (Sales / Total Assets)
o A measure of activity
o It is good to increase overtime
o How good are you at using your equipment to turn:
▪ Cash into inventory
▪ Inventory into sales (cash and AR)
• Return on Assets (Net Income / Total Assets)
o The more ‘stuff’ you have, the more wealth you should create
▪ $1000 Net income / $1000 assets
• This company is doing more well than the one below
▪ $1000 net income / $1,000,000 assets
Of Interest to Owners
• Leverage (Assets / Owner’s Equity)
o How much stuff did you gather using (leveraging) owners’ investment
o How good were you at using the owners’ investment to acquire assets
• Return on Equity (Net Income / Owners’ Equity)
o How much profit did you create using the owners’ investment?
Which is Better?
• Debt (Bonds)
• Equity (Stocks)
• Company’s prefer bonds
o It is a company expense and is tax deductible
o It is dilution
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Document Summary
Business 101 lecture 11 performance measures. Ratios are performance measures: balance sheet, income statement. Which is better: debt (bonds, equity (stocks, company"s prefer bonds, it is a company expense and is tax deductible, it is dilution, if the company is successful, the roe is higher and the return on owner"s is higher. Leverage: use debt (over equity) to get money, raises roi (because bonds are not investments, total assets / total owners" equity, leverage measures the amount of debt versus the amount of equity owned in an asset, therefore, if: It compares the amount you own to the amount you own: total assets = million total owner"s equity = million, leverage = 5 /1 or 5. If: the company has m of debt to cover these assets, total assets = million, leverage = 5 / 4 or 1. 25. Total owner"s equity = million: the company has million of debt to cover these assets.
