BU121 Study Guide - Final Guide: Asset, Wilfrid Laurier University, Operating Leverage

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WILFRID LAURIER UNIVERSITY
BU121 Final Exam
Review Notes
Alex Sheedy
4/13/2013
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Analytical Measures of Financial Performance
Analytical Measures of Financial Performance
o Cash Burn Rate
The rate at which a venture uses cash
Determines the weeks of cash remaining
Cash Burn = Cash Operating Expenses + Interest + Taxes + Increase in
Inventories Changes in Payable and Accruals + Capital Expenditures
Net Cash Burn looks are how cash burn and cash build are related
o Cash Build Rate
How quickly a venture builds cash through sales collections
o Liquidity
The ventures ability to meet short term financial obligations
The ability of a venture to maintain a build rate high enough to meet its
financial obligations
o Conversion Period
The length of the operating capital cycle
Time to convert an asset into cash (affects liquidity)
o \Leverage
The ventures potential to employ and repay debt
It also gives us an idea of the extent at which a firm uses debt and whether
it can meet its debt obligations
A low degree of leverage means there is a lower risk, but also a lower
return
A high degree of leverage shows a higher risk, but a higher return
o Profitability and Efficiency
The ventures ability to provide a return on invested capital
o Current Ratio
The relationship between current assets and current liabilities
average current assets / average current liabilities
Want it between 2 and 4
o Acid Test/Quick Ratio
average current assets average inventories
average current liabilities
Want it greater than 1
o Net Working Ratio to Total Assets Ratio
average current assets average current liabilities
average total assets
Higher percentage means greater liquidity
o Inventory to Sale Conversion Time
average inventory
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cost of goods sold/365
o Sale to Cash Conversion Period
average receivables
net sales/365
Days of sales outstanding or average collection period
o Average Operating Cycle
Inventory to Sale + Sale to Cash
The average time it takes to purchase raw materials, assemble a product,
book the sale, and collect payment
o Purchase to Payment Conversion Period
average payables + average accrued liabilities
cost of goods sold/365
o Purchase-to-Payment Conversion Period
average payables + average accrued liabilities
cost of goods sold/365
o Cash Conversion Cycle
inventory-to-sale + sale-to-cash purchase-to-payment
Looks at the number of days an operation must be externally financed
As close to 0 as possible is ideal
o Total Debt-to-Total Assets
average total debt / average total assets
o Debt-to-Equity
average total debt / average owners’ equity
o Current Liabilities-to-Total Debt
average current liabilities / average total debt
o Interest Coverage
EBITDA / interest
o Fixed Charges Coverage
EBITDA + lease payments
interest + lease payments + (debt repayments/(1-tax rate)
o Gross Profit Margin
(net sales cost of goods sold) / net sales
o Operating Profit Margin
EBIT / net sales
o Net Profit Margin
net income / net sales
o Sales-to-Total Assets
net sales / average total assets
o Operating Return on Assets
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Document Summary

Analytical measures of financial performance: cash burn rate. The rate at which a venture uses cash. Cash burn = cash operating expenses + interest + taxes + increase in. Inventories changes in payable and accruals + capital expenditures. Net cash burn looks are how cash burn and cash build are related: cash build rate. How quickly a venture builds cash through sales collections: liquidity. The ventures ability to meet short term financial obligations. The ability of a venture to maintain a build rate high enough to meet its financial obligations: conversion period. The length of the operating capital cycle. Time to convert an asset into cash (affects liquidity) The ventures potential to employ and repay debt. It also gives us an idea of the extent at which a firm uses debt and whether it can meet its debt obligations. A low degree of leverage means there is a lower risk, but also a lower return.

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