MANAGEMENT SKILLS AND ENTREPRENEURSHIP
MODULE LEADER: DR. RAJENDRA KUMAR
ASSIGNMENT TITLE: BUSINESS PLAN
Table of Contents
1.Hierarchy of Pyramids3
Importance of Leverage3
1.3Return on Investment4
2.The Key Investor Ratios5
2.3Earnings Per Share (EPS)6
2.4Price Earnings Ratio (P/E Ratio)7
3. Importance of Profitability and Liquidity in context of Business Survival7 3.1 Profitability7
3.3 Profitabilityv.s. Liquidity8
4. Management of Working Capital9
5. Financial analysis of Chrisitie11
5.2 Dividend Signaling12
5.3 The Clientele Effect13
1.Hierarchy of Ratios – Pyramid of Ratios
The six core ratios, often described as the ‘Pyramid of Ratios’, indicate the financial stability of an organization. These ratios when set out in a hierarchy, form a pyramid with the ‘Return on Capital Employed’ (ROCE) sitting at the top. The ROCE shows the return for shareholders. There are other ratios which help understand the way a business operates, but the six core ratios explained below remain key ones for owners and managers to help monitor the financial performance of their business.
The return that a business generates, i.e. net profit after tax is divided by equity i.e. the amount of money invested in a business. The ratio is usually expressed as a percentage.
Leverage is measure of money invested by the owner (or in case of a company, owners) against that of the lenders. It is calculated by dividing long term debt by equity (ordinary shared). Also known as gearing, it is generally seen as a warning signal if the leverage is high because the company would have more debt and less equity.
Importance of Leverage
One of the questions, a creditor asks before lending is ‘why should I lend more?’ Injecting more debt makes a business more risky. In the event of failure, the business will have to settle its liabilities and lenders rely on the debtor’s assets in that case. If the company’s liabilities outweigh its assets, it will be considered risky in the eyes of the lender.
Another reason to regulate leverage is the advantage of tax benefits. Since interest payments on debt are tax deductible making the company profitable (higher profit after tax), opportunity on raising debt finance should not simply be ignored altogether.
Hence, a balance between the two is important. A highly geared company indicates that the company might be in difficulty bearing high financial costs. Whereas a low geared company would be missing out on potential higher profits.
1.3Return on Investment (RoI)
RoI is calculated by dividing the return that a business generates after tax (NPAT) with the money that is invested in the business (capital). It is usually expressed as a percentage.
The ratio shows how effective the business is in utilizing all the capital there is at its disposal to generate a profit.
Asset turnover is calculated by dividing the turnover of a business (sales) with the total assets of the business. It measures how efficiently a business is utilizing it's assets to generate its turnover. In other words, it measures how hard the assets are being worked. It is generally expressed as a percentage.
There is no ideal asset turnover figure. Different businesses have different asset turnovers. e.g. A construction business needs expensive machinery compared to a bank, whose assets mainly...