MBA London Guide. Free - Simple - Professional MBA Advice! Financial Metrics for Analysis

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1 MBA London Guide Free - Simple - Professional MBA Advice! Financial Metrics for Analysis This Help Guide is reproduced with the kind permission of MBA Winner. All rights belong to MBA Winner ( Please do not copy 1

2 FINANCE!! The study of finance can be a daunting subject to understand! This is because it contains jargon that you might not be familiar with. We present you with an overview of how financial metrics are used in order to study corporations. In this help guide we are not able to cover all important areas. However, we demonstrate in a practical way how and why the deployment of financial metrics is an important prerequisite for understanding the financial position of any organization. We strongly recommend that you become affilicated with the ratios found at the end of the page and that you study them in accordance with the other complementary resources found on our website. If you have any questions you can contact us directly and we will be happy to help and assist you further. Please respect that the following material belongs to MBA Winner ( and you should not copy it without permission. 2

3 ASSESSING THE POWER OF CORPORATIONS USING FINANCIAL METRICS Assessing and comparing the economic power and position of corporations, and determining whether their power is improving relatively, is considered to be one of the most difficult problem as there is not a single accepted metric for measuring corporate power. Several metrics have been proposed to measure relative corporate power, but they don t present a unanimous conclusion. Based on Grant (1998) there are some common approaches in order to assess corporate power. One of them is considered to be the Industry Concentration Ratios (ICR). ICR calculate the revenues of the largest firms in an industry as a percentage of total industry revenues. The most common concentration ratios are based on the largest four, eight, twenty, and fifty firms in an industry. For example, a four-firm concentration ratio of 0.60 means that the largest four firms in the industry account for 60% of all industry revenues. High concentration ratios can be spotted in industries such as tobacco and petrochemicals. Rising concentration ratios over time suggest that the largest firms in an industry are becoming more powerful relative to their smaller rivals (Kose et al., 2006). A second approach for assessing the power of large corporations can be considered the measurement of economic variables such as revenues and profits, comparing them over time and in relation to broader economic data. For example the revenues trend of a firm can be compared against its global or local counterparties given the size of the company and the countries operating within. In case where a company sources its major part of revenues from a single economy, the 3

4 trend of its revenues can be compared with the trend of the country s GDP for the same period (Zhiguo et al., 2013). However, the aforementioned metrics can be used in order to provide an initial identification about the size of the company and its overall position in the segment and industry operating. At a second level in order to produce a concrete analysis for a firm, an analyst should examine the ratios presented in Table 1. The respective ratios should be calculated for a period of at least five years for the company analyzed and compare the respective ratios with that generated from the comparable companies of the respective firm (Atrill et al.,2009). The analysis and comparison should provide to the analyst an indication about the overall development of the firm within its industry, regarding its revenues evolution, market share, profitability and earnings quality, as well as of its economic health and viability (Brealey et al., 2008). 4

5 Table 1: Financial Ratios Financial indicators ROCE ROE Gross Profit mgn EBITDA mgn EBIT mgn Net profit mgn Asset turnover Current ratio Liquidity/quick/acid-test ratio Interest cover Creditors days Debtors days Gearing Ratio Debt and Equity Net Cash position Net Finance expenses Total debt Effective Interest rate Cash flows from operating activities Operating cash flows to current liabilities Source: Atrill et al., 2009 Definition of the ratios EBIT/(SHEQ+LT Debt) Profit after tax/sheq Gross Profit/Revenues EBITDA/Revenues EBIT/Revenues Net Profit after tax/total revenues Revenues /Average total assets Current assets/current liabilities (Current assets-inventories) /current liabilities EBIT/Interest expense (Average creditors /cost of goods sold)*365 (Average trade debtors/sales)*365 Long term Interest-bearing loans and borrowings/sheq+lt Interest-bearing loans and borrowings Short and Long term Interest-bearing loans and borrowings/sheq Cash and cash equivalents minus short and long term Interest-bearing loans and borrowings Finance income minus finance expenses Short Term & Long term Interest-bearing loans and borrowings Net Finance expense over Total Debt Operating cash flows/current liabilities 5

6 References Atrill P., McLaney E.,(2009): Management Accounting for Decision Makers, Prentice Hall, Financial Times, Sixth Edition Brealey R., Myers S., Allen F.: (2008): Principles of corporate finance, McGraw-Hill/Irwin, London, 8th Edition Grant R., (1998): Measuring Corporate Power: Assessing the Options, in Corporate Power in the United States (Joseph Sora, ed.), H.W. Wilson Company, New York Kose M., Eshwar P., Rogoff K., (2006) Financial globalization: a reappraisal, IMF Staff Papers, V.56, pp.8-62 Zhiguo H., Krishnamurthy A., (2013): Intermediary Asset Pricing, American Economic Review, V. 103(2), pp

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