EVALUATING FINANCIAL PERFORMANCE Financial Management Program Management Department Faculty of Economic Petra Christian University Surabaya, 2009.

EVALUATING FINANCIAL PERFORMANCE

Financial Management ProgramManagement DepartmentFaculty of EconomicPetra Christian UniversitySurabaya, 2009

Learning Objectives

Understand important financial performance measures and their uses, by life cycle stage

Describe how financial ratios are used to monitor a venture performance

Identify specific cash burn rate measures and liquidity ratios and explain how they are calculated and used by the entrepreneur

Identify and describe the use and value of conversion period ratios to the entrepreneur

Learning Objectives

Identify specific leverage ratios and explain their use by lenders and creditors

Identify and describe measures of profitability and efficiency that are important to the entrepreneur and equity investors

Describe limitations when using financial ratios

User of Financial Performance Measures by Life Cycle StageLife Cycle Stage Type of

FinancingFinancial Ratios

& MeasuresUsers of Financial Ratios & Measures

Development & startup stage

Seed financing & startup financing

Cash burn rates and liquidity ratios

Conversion period ratios

Entrepreneur

Business angels

Venture capitalists (VCs)

Survival stage First round financing Cash burn, liquidity, & conversion ratios

Leverage ratios

Profitability & efficiency ratios

Entrepreneur, angels, VCs,

Commercial banks

Rapid growth stage Second round, mezzanine, & liquidity stage financing

Leverage ratios

Profitability & efficiency ratios

Entrepreneur, angels, VCs,

Commercial banks

Investment bankers

Using Financial Ratios

Financial ratiosrelationships between two or more financial variables or between financial variables and time

Trend analysisexamination of a venture’s performance over time

Using Financial Ratios

Cross-sectional analysiscomparison of a venture’s performance against an-other firm at the same point in time

Industry comparables analysiscomparison of a venture’s performance against the average performance of other firms in the same industry

Income Statement

2007 2008

Net sales

Cost of goods sold

Gross profit

Administrative expenses

Marketing expenses

Research & development

Depreciation

EBIT

Interest expense

Income before taxes

Income taxes (30% rate)

Net income

438.000

285.000

153.000

45.000

32.000

20.000

14.000

42.000

12.000

30.000

9.000

21.000

575.000

380.000

195.000

65.000

39.000

27.000

17.000

47.000

20.000

27.000

8.000

19.000

Balance Sheets

ASSETS 2006 2007 2008

Cash & marketable securities

Receivables

Inventories

Total current assets

Gross plant & equipment

Less: accumulated depreciation

Net plant & equipment

Total assets

Liabilities and Equity

Payables

Short term bank loan

Accrued liabilities

Total current liabilities

Long term debt

Owners’ equity

Total Liabilities & equity

10.000

60.000

70.000

140.000

205.000

28.000

177.000

317.000

47.000

40.000

8.000

95.000

100.000

122.000

317.000

10.000

75.000

95.000

180.000

205.000

42.000

163.000

343.000

57.000

44.000

9.000

110..000

90.000

143.000

343.000

5.000

105.000

140.000

250.000

255.000

59.000

196.000

446.000

84.000

110.000

10.000

204.000

80.000

162.000

446.000

Statements of Cash FlowCash flow from operating activities

2007 2008

Net income+ depreciation- Increase in Receivables- increase in Inventories+ increase in payables+ increase in accrued liabilities

Net cash flow from operationsCash flow from investing activities

-Increase in gross equipmentNet cash flow from investing activitiesCash flow from financing activities

+ increase in short-term bank loan-Decrease in long term debt

Net cash flow from financingNet change excluding cash accountBeginning cash and marketable securitiesEnding cash and marketable securities

21.00014.000

-15.000-25.00010.0001.0006.000

00

4.000-10.000

-6.0000

10.00010.000

19.00017.000

-30.000-45.00027.0001.000

-11.000

-50.000-50.000

66.000-10.00056.000-5.00010.0005.000

Cash Burn Rates and Liquidity Ratios

Measuring Venture Cash Burn and Build Amounts and Rates

Traditional Measures of Liquidity

Conversion Period Ratios

Operating Cycle

Measuring Conversion Times

Leverage Ratios

Measuring Financial Leverage

Profitability and Efficiency Ratios Ratios that indicate how efficiently a venture controls its

expenses and uses its assets

Income statement measures of profitability Gross profit margin

= (net sales – COGS)/net sales Operating profit margin

= EBIT/net sales Net profit margin

= net profit/net sales NOPAT margin

= EBIT(1- tax rate)/net sales

Efficiency and Return MeasuresSales-to-Total-Assets Ratio

= net sales/ average total assets

Operating Return on Assets

= EBIT/average total assets

Return on Assets (ROA)

= net profit/average total assets

= net profit/net sales x net sales/average total assets

Return on Equity (ROE)

= net income/average owners equity

= net profit margin x asset turnover x equity multiplier

Thank You