Business Tools for Career Readiness

Finance for
Non-Financial Professionals
Module 3

with David Standen, D.B.A.

Asset Turnover Ratios

A class of financial metrics
Used to measure the turnover of assets such as
inventory and accounts receivable

Asset Turnover Ratios:

Inventory Turnover Ratio

A ratio showing how many times a company's

inventory is sold and replaced over a period.

Asset Turnover Ratios:

Inventory Turnover Ratio

A ratio showing how many times a company's

inventory is sold and replaced over a period.

or

=

Asset Turnover Ratios:

Accounts Receivable
Collection Period

Approximate amount of time it takes for a business to

receive payments owed

Given in terms of receivables, from its customers and

clients.

Asset Turnover Ratios:

Accounts Receivable
Collection Period

Approximate amount of time it takes for a business to

receive payments owed

Given in terms of receivables, from its customers and

clients.


=

Profitability Ratios
Used to assess a business's ability to generate
earnings as compared to its expenses and other
relevant costs incurred during a specific period of
time

Profitability Ratios
Used to assess a business's ability to generate
earnings as compared to its expenses and other
relevant costs incurred during a specific period of
time
Having a higher value relative to a competitor's
ratio is favorable
Having the same ratio from a previous period is
indicative that the company is doing well
Background knowledge is necessary in order to
make relevant comparisons

Profitability Ratios:

Return on Equity (ROE)

ROE = Net Income / Shareholders Equity

Profitability Ratios:

Return on Equity (ROE)

ROE = Net Income / Shareholders Equity

Amount of net income returned as a percentage

of shareholders equity

Measures a corporation's profitability by

revealing how much profit a company generates
with the money shareholders have invested

Profitability Ratios:

Return on Assets (ROA)

Indicator of how profitable a company is relative

to its total assets
ROA = Net Profit / Total Assets

Profitability Ratios:

Return on Assets (ROA)

Indicator of how profitable a company is relative

to its total assets
ROA = Net Profit / Total Assets
Gives an idea as to how efficient management is
at using its assets to generate earnings
Displayed as a percentage
Tells you what earnings were generated from
invested capital (assets)

Profitability Ratios:

Return on Investment (ROI)

Used to evaluate the efficiency of an investment

or to compare different investments

Profitability Ratios:

Return on Investment (ROI)

Used to evaluate the efficiency of an investment

or to compare different investments
ROI

(Gain from investment Cost of investment)

Cost of investment

Popular metric because of its versatility and simplicity

If an investment does not have a positive ROI, or if
there are other opportunities with a higher ROI, then
the investment should be not be undertaken.

Profitability Ratios:

Return on Investment (ROI)

Used to evaluate the efficiency of an investment

or to compare different investments
ROI

(Gain from investment Cost of investment)

Cost of investment

Popular metric because of its versatility and simplicity

If an investment does not have a positive ROI, or if
there are other opportunities with a higher ROI, then
the investment should be not be undertaken.

Profitability Ratios:

Return on Capital Employed

Measures a company's profitability and the

efficiency with which its capital is employed

Profitability Ratios:

Return on Capital Employed

Measures a company's profitability and the

efficiency with which its capital is employed

ROCE =

Earnings Before Interest and Tax (EBIT)

Capital Employed (Assets Current Liabilities

Instead of using capital employed at an arbitrary point

in time, analysts and investors often calculate ROCE
based on Average Capital Employed.

Debt Ratios
Give a general idea of the company's overall debt
load and mix of equity and debt
Can be used to determine the overall level of
financial risk a company and its shareholders face
The greater the amount of debt held by a
company, the greater the financial risk of
bankruptcy

Debt Ratios:

Debt Ratio

Measures the extent of a companys leverage

Debt Ratio

Total Debt
Total Assets

Debt Ratios:

Debt Ratio

Measures the extent of a companys leverage

Debt Ratio

Total Debt
Total Assets

Interpreted as the proportion of a companys assets

that are financed by debt
The higher this ratio, the more leveraged the
company and the greater its financial risk
Debt ratios vary widely across industries

Debt Ratios:

Debt-Equity Ratio

Compares a company's total liabilities to its total

equity
Debt-Equity
Total Liabilities
=
Ratio
Total Shareholders Equity

Debt Ratios:

Debt-Equity Ratio

Compares a company's total liabilities to its total

equity
Debt-Equity
Total Liabilities
=
Ratio
Total Shareholders Equity
Measurement of how much suppliers, lenders,
creditors and obligors have committed to the company
versus what the shareholders have committed
Compares total liabilities to shareholders' equity (as
opposed to total assets in the debt ratio).
A lower the percentage means that a company is
using less leverage and has a stronger equity position