The equity section of the balance sheet can include many items such as preferred stock, common stock par value, additional paid-in capital, retained earnings, and treasury stock. Elaborate on why these items are important for investors, what the items reflect, and what they have to do with the market price of the firm’s shares of stock.
Search the library or the Internet for an academic or industry-related article regarding this thesis and its implications for Saudi Arabia and Saudi Vision 2030.
For your discussion post, your first step is to summarize the article describing what you think are the most important points made by the authors 
check this outhttps://www.youtube.com/watch?v=50JwGq2ubb4&feature=emb_logo
Module 3: Analyzing Financial Performance
1. Key Concepts in Financial Analysis
Financial planning, monitoring financial performance, and cash budgeting are all
important to a company’s viability and success. The sources and uses of cash are
critical to the level of success in all industries. Companies can survive without
financial planning and cash budgeting, but they may not reach their full potential.
Financial analysis and planning are critical in the short term, as well as the long
term. Considering every potential outcome may help save your company by being
prepared for both the worst-case scenario and best-case scenario. Understanding
the meaning of financial analysis can help us plan for all outcomes (Keown, Martin,
& Petty, 2017).
From information derived from the financial statements, financial ratios can be
calculated. Financial ratios allow for meaningful comparisons of a firm’s financial
data across time, and against other firms.
https://www.investopedia.com/terms/r/ratioanalysis.asp

In this video, the author introduces financial ratios and how they are used in financial
analysis of a publicly traded company.
Having financial data restated in relative terms helps people to identify the financial
strengths and weaknesses of a company (Keown et al., 2017).
Financial ratios can be used to:
Identify firm deficiencies in performance
Track performance
Provide information for planning purposes
Lenders, credit-rating agencies, investors, and major suppliers use financial ratios to make
decisions regarding granting credit to a given company. Specifically, financial ratios can be
used to evaluate firm liquidity, effective generation of operational profits, firm financings,
efficient return on equity or capital, and shareholder value. Managers should be aware that,
to use ratios effectively, there can be challenges in finding an appropriate industry to place
the firm. Accounting practices differ and can lead to differences in computed ratios, and
variations in ratios make them difficult to interpret (Keown et al., 2017).
2. Key Equations in Financial Analysis
According to Keown et al. (2017), the traditional approach to teaching financial ratio
analysis starts by identifying the primary categories of ratios. The problem that often
arises from this approach is that there is a slightly different terminology used by
various financial experts. These differences create confusion for many analysts and
students. The categories and ratios listed by Investopedia.com (2019) are presented
in Table 1.
Table 1
Investopedia Financial Ratios
Note: Adapted from Investopedia.com (2019). Financial ratio tutorial.
Keown et al. (2017) preferred to identify financial ratios based on important
questions regarding the financial health of a company. These are the questions
posed by Keown et al. (2017) and the ratios that help to answer these questions:
Question 1:
•
•
•
•
•
How liquid is the firm? Can it pay its bills? (pp. 111–116)
Current Ratio
Acid Test or Quick Ratio?
Average Collection Period
Inventory Turnover
Question 2:
•
•
•
Are the firm’s managers generating adequate operating profits from the
company’s assets? (pp. 111–123)
Operating Return on Assets
Operating Profit Margin
•
•
Total Asset Turnover
Fixed Assets Turnover
Question 3:
•
•
•
How is the firm financing its assets? (pp. 123–126)
Debt Ratio
Times Interest Earned
Question 4:
•
•
Are the firm’s managers providing a good return on the capital provided by
the company’s shareholders? (pp. 126–131)
Return on Equity (ROE)
Question 5:
•
•
•
Are the firm’s managers creating shareholder value? (pp. 131–134)
Market Value Ratios (P/E)
Economic Value Added (EVA)
Keown et al. (2017) also identified the limitations of financial ratio analysis in
accurately determining the financial health of an organization. Key terms and
equations used in financial analysis are listed on page 136. A detailed review of this
information will strengthen your comprehension of financial ratio analysis.
Watch this brief video, which contains a closer look at financial analysis:
https://www.investopedia.com/terms/f/financial-analysis.asp
This video contains a discussion which details the importance of financial analysis.
After having viewed the previous video on financial analysis, consider how you might apply
these concepts to the workplace.
References
Investopedia.com. (2019). Ratio analysis. Retrieved from
https://www.investopedia.com/terms/r/ratioanalysis.asp
Keown, A. J., Martin, J. D., & Petty, J. W. (2017). Foundations of finance: The logic and
practice of financial management (9th ed.). Upper Saddle River, NJ: Prentice Hall.
Welcome to FIN500:
Principles of Finance
Course Learning Outcomes
• Course Learning Outcomes
• Apply the core principles of value-based financial management.
• Analyze financial statements and ratios for evaluation of
organizational performance.
• Discuss the time value of money and the impact of interest
rates on valuation.
• Describe the basic concepts of derivatives, and quantitatively
and qualitatively evaluate stock and bond value and expected
return.
Course Learning Outcomes
Continued
• Course Learning Outcomes
• Apply the primary elements of the corporate investment decision based on
evaluation of risk and return and opportunity costs.
• Calculate and evaluate the cost of capital in relationship to firm value.
• Analyze and evaluate capital budgeting and capital structure considerations
to identify financing options and investment opportunities to achieve
organizational objectives.
• Describe current assets and liabilities, working capital, and credit
management activities related to organizational performance.
Graduate Studies is About:
•
•
•
•
Critical thinking and decision sciences.
Identifying and documenting problems, issues, concerns.
Researching and documenting possibilities and best practices.
Making recommendations and decisions based on analysis of evidence,
data, economics, global marketplace, technology, ethical standards, and
corporate social responsibility.
Graduate Studies is NOT About:
• Opinions
• Beliefs
• Feelings
• Guessing
Textbook
Textbooks are primary to course materials as are the online course materials
and discussions.
You are encouraged to read ahead and be prepared each week to fully
participate in the course materials, discussions, and assignments.
Best Practice for Graduate Studies
1. What you think, feel, and believe is inappropriate if not cited and supported in graduate
school and research.
2. Be clear, concise, focused – at this point we need clarity not volume – just as required in
business.
3. Citations of credible sources are key to providing evidence and documentation of what is
known and is not known.
4. Information and evidence need to be current as business is constantly changing – moving
forward – becoming more effective, efficient, and innovative.
5. Guide to Writing and APA Requirements provides rules, guidelines, and examples to improve
your professional writing and meet assignment expectations. Use the Guide!
Your Courses
Goals:
• Understand expectations
• Value information, evidence, analysis
• Comprehend, understand, and utilize leadership and
management skills
• Be a professional and business writer/communicator
• Apply critical thinking and decision science skills
No Plagiarism Allowed!
• Plagiarism is defined as stealing the “words” of others or
stealing the intent of the “words” of others and using the words
as your own.
• When you use the words/intent of others you use in text
citations to document whose words/intent you are
using/referring.
• The Guide to Writing and APA Requirements provides
examples of citations and references as well as rules on how to
craft appropriate citations and references.
Discussions – Move You Forward!
Your discussion efforts help you to understand and apply concepts and
complete critical thinking assignments. When participating in
discussions remember you should:
•
•
•
•
•
Add and extend the conversation. Don’t repeat information.
Provide documentation/support for statements, ideas, concepts, etc.
Address follow up questions and challenge the status quo.
Identify, document, and communicate best practices.
Prepare for management and leadership situation by researching
issues, problems, and innovation efforts.
• Explore the global marketplace from many perspectives.
Critical Thinking
Critical thinking is the process in which information, data, facts, and theories
are gathered and analyzed. Critical thinking is the process used to facilitate
effective decisions. Critical thinking evaluates options/possible
solutions/opportunities and separates facts from opinions.
• Critical thinkers know how to find information and distinguish facts from
opinions.
• Critical thinkers evaluate and examine an issue from all sides and points of
view.
• Critical thinkers understand the processes involved in projecting impact and
making effective decisions.
• Critical thinkers use data and facts rather than personal judgment or biases.
Critical Thinking Assignments
CSU-Global has critical thinking assignments embedded into each
course to emphasize learning, the application of skills, the
analysis of information, and the enhancement of knowledge
and decision making skills.
All critical thinking assignments require finding and analyzing of
information, review and utilization of outside references,
supported conclusion and or recommendations.
You will be graded on your application of critical thinking skills
Keys to Success
• Read all text assignments and course modules materials
early and often.
• Ask questions via the discussion or email.
• Use the library to find information on topic areas
associated.
• Participate in the discussions at least three days per week
when assigned.
• Utilize your relationship with your instructor.
• Attend Live Sessions and bring your questions and ideas!
Chapter 1
An Introduction
to the Foundations
of Financial
Management
Learning Objectives
• Identify the goal of the firm.
• Understand the basic principles of finance, their
importance, and the importance of ethics and trust.
• Describe the role of finance in business.
• Distinguish between the different legal forms of
business.
• Explain what has led to the era of the multinational
corporation.
15
THE GOAL
OF THE FIRM
The Goal of the Firm
• The goal of the firm is to create value for the firm’s legal
owners (that is, its shareholders). Thus the goal of the
firm is to “maximize shareholder wealth” by maximizing
the price of the existing common stock.
• Good financial decisions will increase stock price and
poor financial decisions will lead to a decline in stock
price.
17
FIVE PRINCIPLES
THAT FORM THE FOUNDATIONS OF
FINANCE
Principle 1:
Cash Flow Is What Matters
• Accounting profits are not equal to cash flows. It is
possible for a firm to generate accounting profits but not
have cash or to generate cash flows but not report
accounting profits in the books.
• Cash flow, and not profits, drive the value of a business.
• We must determine incremental or marginal cash flows
when making financial decisions.
– Incremental cash flow is the difference between the projected
cash flows if the project is selected, versus what they will be, if
the project is not selected.
19
Principle 2:
Money Has a Time Value
• A dollar received today is worth more than a dollar
received in the future.
– Since we can earn interest on money received today,
it is better to receive money sooner rather than later.
20
Principle 2:
Money Has a Time Value (cont.)
• Opportunity Cost – It is the cost of making a choice in
terms of next best alternative that must be foregone.
– Example: By lending money to your friend at zero
percent interest, there is an opportunity cost of 1%
that could potentially be earned by depositing the
money in a savings account in a bank.
21
Principle 3:
Risk Requires a Reward
• Investors will not take on additional risk unless they
expect to be compensated with additional reward or
return.
• Investors expect to be compensated for “delaying
consumption” and “taking on risk.”
– Thus, investors expect a return when they deposit
their savings in a bank (ex. delayed consumption)
and they expect to earn a relatively higher rate of
return on stocks compared to a bank savings account
(ex. taking on risk).
22
Principle 4: Market Prices
Are Generally Right
• In an efficient market, the market prices of all traded
assets (such as stocks and bonds) fully reflect all available
information at any instant in time.
• Thus stock prices are a useful indicator of the value of
the firm. Price changes reflect changes in expected
future cash flows. Good decisions will tend to increase in
stock price and vice versa.
• Note there are inefficiencies in the market that may
distort the market prices from value of assets. Such
inefficiencies are often caused by behavioral biases.
24
Principle 5: Conflicts of Interest
Cause Agency Problems
• The separation of management and the ownership of the
firm creates an agency problem. Managers may make
decisions that are not consistent with the goal of
maximizing shareholder wealth.
– Agency conflict is reduced through monitoring
(ex. annual reports), compensation schemes
(ex. stock options), and market mechanisms
(ex. takeovers)
25
Ethics & Trust in Business
• Ethical behavior is doing the right thing! … but what is
the right thing?
• Ethical dilemma — Each person has his or her own set of
values, which forms the basis for personal judgments
about what is the right thing.
• Sound ethical standards are important for business and
personal success. Unethical decisions can destroy
shareholder wealth
(ex. Enron scandal).
26
THE ROLE
OF FINANCE
IN BUSINESS
The Role of Finance
in Business
Three basic issues addressed by the study of finance:
• What long-term investments should the firm
undertake? (Capital budgeting decision)
• How should the firm raise money to fund these
investments? (Capital structure decision)
• How to manage cash flows arising from day-to-day
operations? (Working capital decision)
28
The Role of Finance in Business
(cont.)
• Knowledge of financial tools is relevant for decision
making in all areas of business
(be it marketing, production etc.) and also in managing
personal finances.
• Decisions involve an element of time and uncertainty …
financial tools help adjust for time and risk.
• Decisions taken in business should be financially viable …
financial tools help determine the financial viability of
decisions.
29
THE LEGAL FORMS
OF BUSINESS ORGANIZATION
Business Forms
Sole
Proprietorship
Partnership
Corporation
Hybrid
S-Type
LLC
Sole Proprietorship
• Business owned by an individual
• Owner maintains title to assets and profits
• Unlimited liability
• Termination occurs on owner’s death or by the owner’s
choice
33
Partnership
• Two or more persons come together as co-owners
• General Partnership: All partners are fully responsible for
liabilities incurred by the partnership.
• Limited Partnerships: One or more partners can have
limited liability, restricted to the amount of capital
invested in the partnership. There must be at least one
general partner with unlimited liability. Limited partners
cannot participate in the management of the business
and their names cannot appear in the name of the firm.
34
Corporation
• Legally functions separate and apart from its owners
– Corporation can sue, be sued, purchase, sell, and own property
• Owners (shareholders) dictate direction and policies of the
corporation, oftentimes through elected board of directors.
• Shareholder’s liability is restricted to amount of investment in
company.
• Life of corporation does not depend on the owners … corporation
continues to be run by managers after transfer of ownership
through sale or inheritance.
35
The Trade-offs:
Corporate Form
• Benefits: Limited liability, easy to transfer ownership,
easier to raise capital, unlimited life (unless the firm goes
through corporate restructuring such as mergers and
bankruptcies).
• Drawbacks: No secrecy of information, maybe delays in
decision making, greater regulation, double taxation.
36
Double Taxation Example
• Assume earnings before tax = $1,000
Federal Tax @ 25% = $250
After tax income available for distribution to
shareholders = $750
• Compute the taxes if the company chooses to distribute
the entire after-tax profits to shareholders as dividends.
37
Double Taxation Example
• If corporation distributes profits as dividends to
shareholders, shareholders will be taxed again.
• Assuming dividends are taxed @ 15%
Dividend tax = 15% of $750 = $112.50
==>Total tax = 250 + 112.5 = $362.5 or 36.25%
38
Hybrid Organizations:
S-Corporation and Limited Liability Companies (LLCs)
• S-Type Corporations
– Benefits
• Limited liability
• Taxed as partnership (no double taxation like
corporations)
– Limitations
• Owners must be people so cannot be used for a
joint ventures between two corporations
39
Hybrid Organizations:
S-Corporation and Limited Liability Companies (LLCs) (cont.)
• Limited Liability Companies (LLC)
– Benefits
• Limited liability
• Taxed like a partnership
– Limitations
• Qualifications vary from state to state
• Cannot appear like a corporation otherwise it will
be taxed like one
40
FINANCE AND THE MULTINATIONAL FIRM:
THE NEW ROLE
Finance and The Multinational
Firm: The New Role
• U.S. firms are looking to international expansion to
discover profits. For example, Coca-Cola earns over 80%
of its profits from overseas sales.
• In addition to US firms going abroad, we have also
witnessed many foreign firms making their mark in the
United States. For example, domination of auto industry
by Honda, Toyota, and Nissan.
42
Why Do Companies
Go Abroad?
• To increase revenues
• To reduce expenses (land, labor, capital, raw material,
taxes)
• To lower governmental regulation standards (ex.
environmental, labor)
• To increase global exposure
43
Risks/Challenges of
Going Abroad
• Country risk (changes in government regulations,
unstable government, economic changes in foreign
country)
• Currency risk (fluctuations in exchange rates)
• Cultural risk (differences in language, traditions, ethical
standards, etc.)
44
THE INCOME
STATEMENT
The Income Statement
• It is also known as Profit/Loss Statement
• It measures the results of firm’s operation over a specific
period.
• The bottom line of the income statement shows the
firm’s profit or loss for a period.
Sales – Expenses = Profits
46
Income Statement Terms
Revenue (Sales)
– Money derived from selling the company’s product or service
Cost of Goods Sold (COGS)
– The cost of producing or acquiring the goods or services to be sold
Operating Expenses
– Expenses related to marketing and distributing the product or service,
general administrative expenses and depreciation expense
Financing Costs
– The interest paid to creditors
Tax Expenses
– Amount of taxes owed, based upon taxable income
47
Common-Sized
Income Statement
• Common-sized income statement restates the income statement items as a
percentage of sales.
• Common-sized income statement makes it easier to compare trends over time and
across firms in the industry.
• See Table 3.1
51
Common-Sized Income
Statement
See Table 3.1
•
Gross profit margin (or percentage of sales going towards gross profit) is 34.3%
•
Operating profit margin (or percentage
of sales going towards operating profit) is 8.5%
•
Net profit margin (or percentage of sales going towards net profit) is 4.9%
52
THE BALANCE SHEET
The Balance Sheet
• The balance sheet provides a snapshot of a firm’s
financial position at a particular date.
• It includes three main items: assets, liabilities, and
owner-supplied capital (shareholders’ equity).
– Assets (A) are resources owned by the firm.
– Liabilities (L) and owner’s equity (E) indicate how those
resources are financed:
A=L+E
• The transactions in balance sheet are recorded at cost
price, so the book value of a firm may be very different
from its current market value.
54
Balance Sheet Terms: Assets
Current assets comprise assets that are relatively liquid, or
expected to be converted into cash within 12 months.
Current assets typically include:
– Cash
– Accounts Receivable (payments due from customers who buy
on credit)
– Inventory (raw materials, work in process, and finished goods
held for eventual sale)
– Other assets (ex.: Prepaid expenses are items paid for in
advance)
56
Balance Sheet Terms: Assets
Long-Term Assets: Fixed Assets and Other Assets
• Fixed Assets
–
Include assets that will be used for more than one year. Fixed
assets typically include:
•
Machinery and equipment, Buildings, Land
• Other Assets
–
Assets that are neither current assets nor fixed assets. They
may include long-term investments and intangible assets such
as patents, copyrights, and goodwill.
57
Balance Sheet Terms:
Liabilities
Debt (Liabilities)
–
Money that has been borrowed from a creditor and must be repaid at some
predetermined date.
–
Debt could be current (must be repaid within twelve months) or long-term (repayment
time exceeds one year).
58
Balance Sheet Terms: Liabilities
Short-Term Debt (Current Liabilities)
– Accounts payable (Credit extended by suppliers to a firm when
it purchases inventories)
– Accrued expenses (Short-term liabilities incurred in the firm’s
operations but not yet paid for)
– Short-term notes (Borrowings from a bank or lending
institution due and payable within 12 months)
Long-Term Debt
– Borrowings from banks and other sources for more than one
year
59
Balance Sheet Terms: Equity
• Equity: Shareholder’s investment in the firm in the form of preferred
stock and common stock. Preferred stockholders enjoy preference
with regard to payment of dividend and seniority at settlement of
bankruptcy claims.
• Treasury Stock: Stock that have been repurchased by the company.
• Retained Earnings: Cumulative total of all the net income over the
life of the firm, less common stock dividends that have been paid
out over the years. Note that retained earnings are not equal to
hard cash!
60
Table 3-2
Table 3-2
• Total assets decreased by $752 million due to reduction in current assets and in net
fixed assets.
• Total debt and equity decreased by $752 million due to paying of $263 owed on
accounts payable, repurchasing stock of $2.608 billion, receipt of $335 million from
issue of new stock, and increase in retained earnings of $1.769 billion.
62
Net Working Capital
Net Working Capital
= Current assets – current liabilities
– The larger the net working capital, the better the firm’s ability
to repay its debt.
– Net working capital can be positive or zero or negative. It is
generally positive.
– An increase in net working capital may not always be good
news. For example, if the level of inventory goes up, current
assets will increase and thus net working capital will also
increase. However, increasing inventory level may well be a sign
of inability to sell.
63
MEASURING
CASH FLOWS
Measuring Cash Flows
• Profits in the financial statements are calculated on “accrual basis” rather than “cash
basis” (see next slide for accrual basis accounting).
• Thus, profits are not equal to cash.
65
Accrual Basis Accounting
• Accrual basis is the principle of recording revenues when
earned and expenses when incurred, rather than when
cash is received or paid.
– Thus, sales revenue recorded in the income statement includes
both cash and credit sales. Similarly, inventory purchases may
not be entirely paid for in cash as suppliers may extend credit
for some of the purchases.
• Treatment of long-term assets: Asset acquisitions (that
will last more than one year, such as equipment) are not
recorded as an expense but are written off every year as
depreciation expense.
66
Sources and Uses of Cash
Sources of Cash
? Decrease in an Asset
? Example: Selling inventories
or collecting receivables
provides cash
? Increase in Liability or Equity
? Example: Borrowing funds or
selling stocks provides cash
Uses of Cash
? Increase in an Asset
? Example: Investing in fixed
assets or buying more
inventories uses cash
? Decrease in Liability or
Equity
? Example: Paying off a loan or
buying back stock uses cash
How to Measure a Firm’s Cash Flows
68
Three Sources of Cash Flows
•
Cash flows from Operations
(ex. Sales revenue, labor expenses)
•
Cash flows from Investments
(ex. Purchase of new equipment)
•
Cash flows from Financing
(ex. Borrowing funds, payment of dividends)
69
Three Sources of Cash Flows
(cont.)
• If we know the cash flows from operations, investments, and financing, we can
understand the firm’s cash flow position better, that is, how cash was generated and
how it was used.
70
Questions?
Chapter 4
Evaluating
a Firm?s Financial
Performance
Learning Objectives
• Explain the purpose and importance of
financial analysis.
• Calculate and use a comprehensive set of
measurements to evaluate a company’s
performance.
• Describe the limitations of financial ratio
analysis.
4-2
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THE PURPOSE OF
FINANCIAL ANALYSIS
4-3
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The Purpose of
Financial Analysis
Financial Analysis using Ratios
• A popular way to analyze the financial statements is
by computing ratios. A ratio is a relationship
between two numbers, e.g., a given ratio of A:B =
30:10 means A is 3 times B.
• A ratio by itself may have no meaning. Hence, a
given ratio is compared to:
– ratios from previous years
– ratios of other firms and/or leaders in the same industry
4-4
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Uses of Financial Ratios:
Within the Firm
• Identify deficiencies in a firm?s performance
and take corrective action.
• Evaluate employee performance and
determine incentive compensation.
• Compare the financial performance of the
firm’s different divisions.
4-5
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Uses of Financial Ratios:
Within the Firm
• Prepare, at both firm and division levels,
financial projections.
• Understand the financial performance of the
firm?s competitors.
• Evaluate the financial condition of a major
supplier.
4-6
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Uses of Financial Ratios:
Outside the Firm
Financial ratios are used by:
• Lenders in deciding whether or not to lend to a
company.
• Credit-rating agencies in determining a firm?s credit
worthiness.
• Investors (shareholders and bondholders) in
deciding whether or not to invest in a company.
• Major suppliers in deciding to whether or not to
extend credit to a company and/or in designing the
specific credit terms.
4-7
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MEASURING KEY
FINANCIAL
RELATIONSHIPS
4-8
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Question 1
How Liquid Is the Firm? Can It Pay Its Bills?
• A liquid asset is one that can be converted
quickly and routinely into cash at the
current market price.
• Liquidity measures the firm?s ability to pay
its bills on time. It indicates the ease with
which non-cash assets can be converted to
cash to meet the financial obligations.
4-9
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How Liquid Is the Firm?
Liquidity is measured by two approaches:
– Comparing the firm?s current assets and current
liabilities
– Examining the firm?s ability to convert accounts
receivables and inventory into cash on a timely
basis
4-10
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Measuring Liquidity:
Perspective 1
Compare a firm?s current assets with current
liabilities using:
– Current Ratio
– Acid Test or Quick Ratio
4-11
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4-12
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4-13
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Current Ratio
• Current ratio compares a firm?s current assets to its
current liabilities.
Coca-Cola = $32,986M
$32,274M = 1.02
• Coca-Cola has only $1.02 in current assets for
every $1 in current liabilities. Coca-Cola’s liquidity
is lower than that of PepsiCo, which has a current
ratio of 1.14.
4-14
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Acid Test or Quick Ratio
• Quick ratio compares cash and current assets (minus
inventory) that can be converted into cash during the
year with the liabilities that should be paid within the
year.
Coca-Cola = ($21,675+ $4,466M)
($32,374M) = 0.81
• Coca-Cola has 81 cents in quick assets for every $1
in current debt. Coca-Cola is slightly less liquid than
PepsiCo, which has 85 cents for every $1 in current
debt.
4-15
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Measuring Liquidity:
Perspective 2
• Measures a firm?s ability to convert accounts
receivable and inventory into cash:
– Days in Receivables or Average Collection Period
– Inventory Turnover
4-16
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Days in Receivables
(Average Collection Period)
• How long does it take to collect the firm?s
receivables?
Coca-Cola = ($4,466M)
($45,998M/365) = 35.44 days
• Coca-Cola (at 35.44 days) is slightly faster than
PepsiCo (at 36.41 days) in collecting accounts
receivable.
4-17
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Accounts Receivable Turnover
• How many times are the accounts
receivable “rolled-over” each year?
Coca-Cola = $45,998M
$4,466M = 10.30X
• The conclusion is the same—Coca-Cola
(10.30X) is slightly faster than PepsiCo
(10.33X) in collecting accounts receivable.
4-18
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Days in Inventory
• How long is the inventory held before being sold?
Coca-Cola = ($3,100M)
($17,889M
365)= 63.25 days
• Coca-Cola carries inventory for a longer time than
PepsiCo (37.15 days).
4-19
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Inventory Turnover
• How many times are the firm’s inventories
sold and replaced during the year?
Coca-Cola = $17,889M
$3,100M= 5.77X
• The conclusion is the same—Coca-Cola
moves inventory much slower than PepsiCo
(9.83X).
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Question 2: Are the Firm?s Managers
Generating Adequate Operating Profits from
the Company?s Assets?
• This question focuses on the profitability of
the assets in which the firm has invested.
We consider the following ratios to answer
the question:
– Operating Return on Assets
– Operating Profit Margin
– Total Asset Turnover
– Fixed Assets Turnover
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Operating Return on Assets
(ORA)
• ORA indicates the level of operating profits relative
to the firm?s total assets.
Coca-Cola = $9,707M
$92,023M = 0.105 or 10.5%
• Thus managers are generating 10.5 cents of
operating profit for every $1 of assets which is
quite a bit less than PepsiCo (13.7%)
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Disaggregation of
Operating Return on Assets
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Managing Operations:
Operating Profit Margin (OPM)
• OPM examines how effective the company is in
managing its cost of goods sold and operating
expenses that determine the operating profit.
Coca-Cola = $9,707M
$45,998M = 0.211 or 21.1%
• Coca-Cola managers are better than PepsiCo in
managing the cost of goods sold and operating
expenses, as the Operating Profit Margin for
PepsiCo is only 14.5%.
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Managing Assets:
Total Asset Turnover
• This ratio measures how efficiently a firm is using
its assets in generating sales.
Coca-Cola = $45,998M
$92,023M = .50X
• Coca-Cola is generating 50 cents in sales for every
$1 invested in assets, which is much lower than
PepsiCo (.95X).
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Managing Assets:
Fixed Asset Turnover
• Examines efficiency in generating sales from
investment in “fixed assets”
Coca-Cola = $45,998M
$14,633M = 3.14X
• Coca-Cola generates $3.14 in sales for every $1
invested in fixed assets, which is lower than
PepsiCo (3.87X)
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