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Strategic Management
Chapter 2 - Strategic Mgmt and Firm Performance
31
Business
Undergraduate 4
05/29/2012

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Cards

Term
Above-average returns
Definition
Above-average returns are returns in excess of what an investor expects to earn from other investments with a similar amount of risk
Term
Average returns
Definition
Average returns are returns equal to what an investor expects to earn given a similar amount of risk
Term
Below-average returns
Definition
Below-average returns are returns that are less than what an investor expects given a similar level of risk
Term

Profitability Ratio's - P

Gross Profit Margin

 

Sales - COGS

Sales

Definition
Measures the revenue left to cover operating expenses after taking out the cost of procurement
Term

P - Operating Profit Margin

 

Profit before Interest & Taxes

Sales

Definition
Assesses firm profitability without regard to interest charges as a result of the capital structure
Term

P - Net Profit Margin (Return on Sales)

 

Profit after taxes

Sales

Definition
After-tax profits per dollar of sales
Term

P - Return on Total Assets

 

Profit after taxes (could use + interest)

Total Assets

Definition

Measures the return on the total investments in the firm

 

It may be appropriate to add interest to the numerator to obtain a measure of returns to both debt and equity of investors

Term

P - Return on Shareholders' Equity

 

Profit after taxes (PAT)

Total shareholders' equity

Definition
Rate of return to shareholders given their investments in the firm
Term

P - Return on Common equity


PAT - preferred stock dividends

Total shareholders' equity

Definition
Return on investment which common shareholders have made in the firm
Term

P - Earnings per Share

 

PAT - preferred stock dividends

# of common shares outstanding

 

Definition
Earnings available to common shareholders
Term

Liquidity Ratio - Li

Current Ratio

 

Current Assets

Current Liabilities

Definition
Measures the ability to cover short-term debt by assets convertible to cash in appropriately same period as short-term debt matures
Term

Li - Quick Ratio (Acid Test)

 

Current assets - inventory

Current liabilities

Definition
Measure of ability to pay off short-term debt without relying on inventory (most difficult current asset to convert to cash)
Term

Li - Inventory to net working capital

 

           Inventory        

Current assets - current liabilities

Definition
Measure of the extent to which a firm's working capital is tied up in inventory
Term

Leverage Ratio - Le

 

Debt-to-assets Ratio

 

Total Debt

Total Assets

Definition
Measures use of debt to finance operations
Term

Le - Debt-to-equity Ratio

 

       Total Debt      

Total Shareholders' Equity

Definition
Measures use of debt relative to shareholders' investment in firm
Term

Le - Long-term debt-to-equity Ratio

 

       Long-term debt     

Total shareholders' equity

Definition
Measures balance between debt and equity in the long-term capital structure of the firm
Term

Le - Times Interest Earned

 

Profit before Interest & Taxes

Total interest charged

Definition
Measures how much profits can decline before firm unable to meet interest obligations
Term

Le - Fixed-charge coverage

 

Profit before interest & taxes, interest and lease obligation

Interest charges + lease obligations

Definition
A more inclusive measure of ability of firm to handle all of its fixed-charge obligations
Term

Activity Ratios

 

A/R turnover

 

Annual credit sales

A/R

Definition
Measures average time to collect on credit sales
Term

Act - Average Collection Period

 

            A/R          

Total Sales / 365

Definition
Average time it takes to receive payment for a sale
Term

Act - Inventory Turnover

 

     COGS   

Average inventory

Definition
Measure speed with which firm is turning over its inventory
Term

Act - Fixed-assets Turnover

 

    Sales   

Fixed Assets

Definition
Measures sales productivity and plant & equipment utilization
Term

Act - Total Assets Turnover

 

     Sales  

Total Assets

Definition
Measures utilization of a firm's assets.  If below industry average, a firm is not generating the volume expected given its investment in assets
Term

Other Ratios

 

Dividend yield on common stock

 

Annual dividends per share

current market price / share

Definition
Measures return to common shareholders
Term

Price-earning Ratio

 

Current market price / share

After-tax earnings / share

Definition
Indicates market perception of the firm.  Usually, faster growing or less risky firms tend to have higher P/E ratios than more risky or slower growing firms
Term

Dividend Payout Ratio

 

Annual dividends / share

After-tax earnings / share

Definition
Indicates dividends paid out as a percentage of profits
Term

Cash Flow / Share

 

After-tax profits + depreciation

# of common shares outstanding

Definition
Measures total cash per share available to firm
Term

Break-even Analysis

 

     Fixed Costs   

Contribution Margin

 

CM = (Selling price / unit) - Variable price / unit

Definition
Measures the number of units of product or service that need to be sold to begin to make a profit on that product or service
Term
Market Value Added - MVA
Definition
MVA is the difference between the cash that investors expect to receive (given the current market value of the firm) and the amount of cash that debt and equity holders have invested in the firm since its inception.
Term
Economic Value Added - EVA
Definition
EVA is an internal measure of a firm's ability to generate MVA in the future.  It is measured by taking the amount of operating capital at the beginning of each year and multiplying it by the difference between the rate of return on capital and the weighted average cost of the debt and equity capital employed
Term
Triple Bottom Line
Definition
A framework for measuring and reporting firm performance against economic, environmental and social parameters
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