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BusinessWorks Inc - A Dotcom in making

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Financial Plan - Performance Review

Monday, December 06, 2004
Performance Review is the last component of the Financial plan. Buyers, investors always face a dilemma before buying or investing in a business about the valuation of the company. Valuation can be a very subjective matter, so they have come out with financial ratios which presents the investor with a decision making tool. These ratios are defined in the areas of Performance, Financing, company activity and Liquidity. We will discuss about Performance related ratios. There are 10 ratios associated with performance of the company:

Average Interest Rate: This is the average rate of interest at which company borrows. This is a useful measurement that tells you how much debt company is carrying from year to year.
Formula to calculate Average Interest Rate is (Interest Expense - Accounts Payable) / Liabilities..

Book Value per Share: This is the accounting value of the share and is radically different than the value that market percieves for the share. Market and book value have nothing in common. Market value is what the investors expectations are and book value is based on costs and retained earnings. Only time Book value is useful when market value is below book value. In such a situation, share is considered to be undervalued and may be an attractive buy for the investor. Formula to calculate Book Value is (Stockholders Equity - Preferred Stock) / Average Outstanding Shares.

Cash Flow to Assets Ratio: This ratio tells us how much cash can company generate with respect to its size. A profitable company is not of much use if it does not have enough cash around to pay the bills. Higher the ratio better it is. Formula to calculate this ratio is Cash from Operations / Total Assets.

Dividend Payout Ratio: This ratio indicates what portion of earnings can be used to pay dividends to the shareholders. Nowadays companies prefer to reinvest this payout in the growth of business. Formula to define this ratio is Yearly Dividend per Share / Earnings per share.

Earnings per Share (EPS) : This popular ratio tells you how much profit was generated per share. However real picture is seen when current EPS is compared to the previous years. Formula to calculate EPS is (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares.

Gross Profit Margin: This ratio gives pretty good idea about company's pricing policies and markup margins. A stable Gross profit Margin is seen as a healthy sign. Gross Profit Margin is calculated as (Revenue - Cost of Goods Sold) / Revenue.

Price to Earnings Ratio (PE Ratio): Another popular ratio which is used to compare the current share price with earnings to indicate if stock is under or over valued. Formula is Market Value per Share / Earnings per Share.

Profit Margin: This indicates what proportion of sales contribute towards the income of the company. A low margin indicates poor pricing strategy or strain from competition. Formula is Net Income / Revenue.

Return on Assets: This tells us what return a company is generating on it's investments and assets. That is why, this ratio is also referred as ROI or Return on Investment. It is calculated as (Net Income + Interest Expenses) / Total Assets.

Return on Equity: This is amount of return, company is generating on the shareholder's investment and is defined as Net Income / Shareholder's Equity.
12/06/2004 11:31:00 PM :: ::
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