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Final

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


Department
Business
Course Code
BU121
Professor
Roopa Reddy
Study Guide
Final

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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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