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Key Management Ratios: The Clearest Guide to the Critical Numbers That Drive Your Business, Fourth Edition

Book Description

A solid bestseller from the hugely successful Key Management Series. This book enables managers of different functions to work together towards achieving common business goals, linking the return on financial resources into the day-to-day operating parameters of the business.

  • An essential guide that shows you how to analyse, compare and control the figures that drive company value - if you understand how these ratios work, you’ll manage your company’s performance better.

  • It offers an intelligent but "ultra-clear" description of the essential management ratios - with visual aids.

  • Nails a confusing area that courses and other books ignore.

Table of Contents

  1. Copyright
    1. Dedication
  2. Financial Times Prentice Hall
  3. About the author
  4. Acknowledgments
  5. Foreword
  6. Key for symbols
  7. I. Foundations
    1. 1. Background
      1. Why do you need this book?
      2. The form and logic
      3. Method
      4. The philosophy
      5. Excitement
      6. Data that makes sense
    2. 2. Financial statements
      1. Introduction
        1. The balance sheet (B/S)
        2. The profit and loss (P/L) account
        3. The cash flow (C/F) statement
        4. Summary
      2. The balance sheet
        1. Assets and liabilities
        2. Balance sheet structure
        3. Current assets (CA)
      3. Balance sheet structure – fixed assets
        1. 1. Intangibles
        2. 2. Net fixed assets
        3. 3. Investments
      4. Balance sheet structure – liabilities
        1. Current liabilities (CL)
        2. Long-term loans (LTL)
        3. Owners’ funds (OF)
          1. 1. Issued common stock
          2. 2. Capital reserves
          3. 3. Revenue reserves
      5. Summary
    3. 3. Balance sheet terms
      1. Introduction
      2. The terms used
        1. Total assets (TA)
        2. Capital employed (CE)
        3. Net worth (NW)
        4. Working capital (WC)
    4. 4. Profit and loss account
      1. Introduction
        1. Total revenue earned
        2. Total costs incurred
        3. Profit and loss – general observations
        4. Profit/loss – terms
      2. Working data
        1. The Example Company plc
        2. The US Consolidated Company Inc.
        3. Sectoral/geographical data
  8. II. Operating performance
    1. 5. Measures of performance
      1. Relationships between the balance sheet and profit and loss account
      2. The ratios ‘return on total assets’ and ‘return on equity’
      3. Balance sheet layouts
        1. Vertical balance sheet – version 1
        2. Vertical balance sheet – version 2
    2. 6. Operating performance
      1. Return on investment (ROI)
        1. Two measures of return on investment
      2. Return on equity (ROE)
      3. Return on total assets (ROTA)
      4. Standards of operating performance
        1. Return on equity – geographic and sectoral analysis
        2. Return on total assets – geographical and sectoral analysis
        3. The components of return on total assets
          1. Example A
          2. Example B
          3. Example C
        4. ‘Margin’ and ‘Sales to Total Assets’ standards
        5. Sector parameters – return on total assets
    3. 7. Performance drivers
      1. Operating performance
        1. Drivers of margin on sales
        2. Drivers of the sales to total assets ratio
        3. Margin on sales – drivers
        4. Sales/total assets – drivers
      2. Operating profit model
        1. Model variations
          1. Sales to accounts receivable
          2. Sales to inventories
        2. ‘Sales to fixed assets’ ratio – international standards
        3. Inventory days – international standards
        4. Debtor days – international standards
  9. III. Corporate liquidity
    1. 8. Cash flow cycle
      1. Corporate liquidity
      2. The cash cycle
        1. Cash flow – the role of profit and depreciation
        2. Depreciation and cash flow
        3. Non-operating cash out-flows
          1. Interest, tax and dividends
          2. Loan repayments
          3. Capital expenditure
        4. Non-operating cash in-flows
          1. New equity capital
          2. New long-term loans
          3. Sale of fixed assets
      3. Measures of liquidity – long and short analysis
        1. Company profiles
    2. 9. Liquidity
      1. Short-term liquidity measures
      2. Current ratio
      3. Quick ratio
      4. Working capital to sales ratio
      5. Working capital days
    3. 10. Financial strength
      1. Interest cover
      2. ‘Debt to equity’ ratio (D/E)
        1. Debt/equity – methods of calculation
        2. Debt/equity – why it is important
      3. Leverage
      4. Summary
    4. 11. Cash flow
      1. The cash flow statement
      2. Sources and uses of funds – method
        1. Rules of construction
        2. Hidden movements
      3. Opening and closing cash reconciliation
      4. Long and short analysis
        1. Long and short strategy
      5. Financial reporting standards
  10. IV. Determinants of corporate value
    1. 12. Corporate valuation
      1. Introduction
      2. Share values
        1. Nominal (par) value $2.50
        2. Book value (asset value, or asset backing) $11.25
        3. Market value $22.50
        4. Earnings per share (EPS)
        5. Dividends per share (DPS)
        6. Dividend cover and the pay-out ratio
        7. Earnings and dividend yield ratios
        8. Price to earnings ratio (P/E)
        9. Market to book ratio
    2. 13. Financial leverage and corporate valuation
      1. Introduction
      2. Financial leverage
      3. V chart
        1. V chart dynamics
      4. Market to book ratio
        1. Importance of ROE
        2. Corporate valuation model
    3. 14. Growth
      1. Growth
      2. Analysis
      3. Growth equilibrium
        1. Growth equilibrium – scenarios
        2. General model of growth equilibrium
        3. Self-funding growth – international standards
      4. Application to acquisitions
  11. V. Management decision-making
    1. 15. Cost, volume and price relationships
      1. Introduction
      2. Costing illustration
        1. Cost classification
      3. Contribution
        1. Cash flow and contribution
        2. Contribution and profit
        3. Total contribution
      4. Break-even (B/E)
        1. Break-even (B/E) Chart
      5. Contribution to sales percentage (CPS)
        1. Total contribution – alternate views
        2. Problem solving using CPS
        3. Weighted CPS
        4. Product mix
        5. A Step beyond contribution to sales percentage
        6. Contribution per unit of capacity
      6. Summary
    2. 16. Investment ratios
      1. Introduction
      2. Project appraisal – the problem
      3. Project appraisal – steps to a solution (1)
      4. Project appraisal – steps to a solution (2)
        1. The discount factor
      5. Project appraisal – present value (PV)
        1. The meaning of Net Present Value (NPV)
      6. Project appraisal – internal rate of return (IRR)
      7. Project appraisal – summary
    3. 17. Shareholder value added (SVA)
      1. Introduction
      2. Description
        1. Operating assets
      3. Approach to valuation (1)
        1. Forecast assumptions
      4. Approach to valuation (2)
        1. Forecast net cash flow
        2. Depreciation and cash flow
        3. Total present value
        4. Terminal value
        5. Interpretation of present value
      5. Value for the equity shareholders
        1. 1. Non-operating assets
        2. 2. Non-equity funds
      6. Discount factor
        1. Weighted average cost of capital (WACC)
        2. The cost of equity capital
        3. The capital asset pricing model
        4. How added value is created
        5. Alternative growth/value scenarios
      7. Terminal (continuing) value
      8. Complete model
    4. 18. Acquisition analysis
      1. Introduction
      2. Financial profile of Alpha Inc.
        1. Profitability
        2. Liquidity
        3. Growth
        4. Valuation – price earnings ratio
        5. Summary profile
      3. Financial profile of Beta Inc.
        1. Profitability
        2. Liquidity
        3. Growth
        4. Valuation – price earnings ratio
        5. Summary profile
      4. Acquisition – first offer
      5. Acquisition impact on EPS
      6. Shareholder effects – generalized
        1. APS (assets per share)
        2. DPS (dividend per share)
        3. PPS (price per share)
      7. Summary of effects on shareholders
      8. Revised offer
      9. Relative versus absolute values
        1. Value drivers
        2. Weighted average cost of capital (WACC)
        3. Non-equity funds
      10. SVA models – Alpha Inc. and Beta Inc.
        1. Implication for acquisition exercise
      11. Addendum
        1. 1. Sales
        2. 2. Change
        3. 3. Operating profit
        4. 4. After-tax profit
        5. 5. Investment in fixed assets
        6. 6. Investment in working capital
        7. 7. Total investment
        8. 8. Net cash flow
        9. 9. WACC – discount factor
        10. 10. Present value (PV)
        11. 11. Value of operations
        12. 12. Non-equity
        13. 13. Equity value
        14. 14. Number of equity shares
        15. 15. Value per share
        16. 16. Terminal value
    5. 19. Integrity of accounting statements
      1. Introduction
      2. Where we focus attention
      3. Operating revenue enhancement
        1. Revenue recognition
        2. Premature revenue
          1. Method 1 – backdating
          2. Method 2 – stuffed revenue
          3. Method 3 – revenue invoiced but not shipped
          4. Method 4 – revenue for goods shipped but not ordered
          5. Method 5 – revenue for long-term contracts
          6. Method 6 – consignment and instalment sales
      4. Methods of revenue enhancement – fictitious sales
        1. Method 1 – Side-letter
        2. Method 2 – Contra agreement
        3. Method 3 – Conditional sale
        4. Method 4 – Vendor funds sale
        5. Method 5 – Purchaser unlikely to pay
        6. Method 6 – Sales to associated companies
        7. Method 7 – Pure bogus sales
      5. Revenue enhancement – clues for detection
        1. Revenue recognition policies
        2. Accounts receivable days
        3. Sales capacity
        4. Cash flow
      6. Operating cost
        1. Depreciation and amortization
        2. Capitalized costs
        3. Use of reserves
      7. The balance sheet
        1. Overvalued assets – accounts receivable
        2. Overvalued assets – inventory
        3. Overvalued assets – prepayments
        4. Undervalued liabilities – accruals
        5. Undervalued liabilities – accounts payable
        6. Issues affecting only the balance sheet
          1. Operating leases
          2. Capital leases
          3. Special purpose entity (SPE)
      8. The cash flow statement
        1. Cash flow categories – see figure 19.1
        2. Cash flow from operations (CFFO)
        3. CFFO versus net income
  12. 1. Special items
    1. Introduction
    2. Goodwill on acquisition
      1. A goodwill acquisition
    3. Foreign currency
    4. Pensions
    5. Deferred tax
    6. Finance leases
    7. Revaluation of fixed assets
    8. Scrip issue
    9. Miscellaneous long-term funds
      1. Preference shares
      2. Minority interests
      3. Deferred tax, grants and miscellaneous provisions
    10. EBITDA
    11. Terminal value calculation in the SVA model
      1. Annuity approach
      2. Long-term growth approach
  13. 2. Companies used in the sample
    1. United States
    2. United Kingdom
    3. European Union
    4. Japan
  14. 3. Full set of ratio charts from sample companies
  15. 4. Discounting and compounding tables
    1. Present value of $1
    2. Present value of annuity of $1
    3. Future value of $1
    4. Future value of annuity of $1
  16. Glossary