Purchasing and Financing 2024

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ent, and wage expenses, but before deducting interest and income tax expenses. It’s also referred to as EBIT (earnings before interest and income taxes) and is a measure of a company's profitability from operations. As a percentage of sales, it is called operating margin, and calculated as follows: Operating Margin = Operating Income/Sales Both are key measures of how effective a company is at controlling the costs and expenses associated with its normal business operations. The 80/20 Principle The 80/20 Principle was devised by Vilfredo Pareto (1848-1923), to demonstrate that 80% of wealth comes from 20% of the population. This principle could also be applied outside economics to just about anything. When applied to a company’s product line it means that 80% of a company's revenue comes from 20% of the products. Off cause the 80/20 Principle can also apply to revenue and expenses. Roughly 80% of your sales may come from 20% of your products. Similarly, 80% of your sales may be supported by 20% of your expenses. Evaluating the Growth of a Business The final number to look at on the income statement is net income as. Net Profit Margin = Net Income/Sales The Income Statement separates Operating Revenue, revenue generated from the main operations of the business, from non-operating revenue. The Income Statement also separates Operating Expenses, those expenses required to support the main operations of the business, from non-operating expenses. Income Taxes and interest are considered non-operating expenses. To evaluate the growth of the company these figures must of cause be compared with those of preceding periods to see if growth rate is declining or improving. Evaluating the Returns on Investment in a Company a. Return on Equity Return on Equity (ROE) is one of the most important financial ratios in business. It measures how well a company used Owner's Equity to generate profits and is regarded is the best indicator of bottom-line performance by some analysts. 48
ROE = Net Income/Average Stockholders or Owners Equity Where: Average Equity = (Beginning Equity + Ending Equity)/2 When a company has a high ROE, it is efficiently using the assets that investors have provided to it by increasing the equity, or value of the company. It is important to compare ROE with industry standards. Some industries, such as the construction industry, require more debt than industries like software, which tend to have less capital-intensive assets and liabilities. Companies with low debt levels and high ROE numbers are even more efficient at utilizing investors' money to increase equity. Technology companies, for example, with clean balance sheets (low debt levels) often post high ROE numbers due to high profit margins, not high debt levels. Because it is difficult to maintain high ROE levels for the long-term, it is also important to consider ROE over longer periods of time. b. Return on Assets Return on Assets shows how effectively a company employed its assets to generate profits. ROA = Net Income/Total Assets Because a company may own or finance its assets, the ratio measures how well a company has converted all of its resources into profit. It is therefore the most stringent measure of how well a company has utilized its resources to generate profits. A higher number indicates a firm more effectively employed its assets to generate profits. Asset intensive industries such as manufacturing and railroads have much lower percentages due to a much larger asset base, while the software industry generally has much higher percentages due to fewer assets required to generate profits. For this reason, it is important to compare the results with industry standards and competitors. High ROA levels may be due to a short - term factors such as one time gains that increase earnings and ROA, a strong economy or a peak in the business cycle. For this reason it is important to review a long-term average of ROA: INDIVIDUAL ASSIGNMENT: Comment on the Financial Position and Liquidity, Management Efficiency, Profitability, Growth Rates, and Investment Returns of XYZ Limited Group by calculating the relevant information in each case. 49
Page 1 and 2: CATS Program Commercial Advancement
Page 3 and 4: PART A. PURCHASING MANAGEMENT 1. TH
Page 5 and 6: Quality Regarding quality, you must
Page 7 and 8: Price Before one can measure the su
Page 9 and 10: 5. STOCK CLASSIFICATION BASED ON TU
Page 11 and 12: CLASS ASSIGNMENT: A handcraft shop
Page 13 and 14: 7. ORDERING SYSTEMS After it was de
Page 15 and 16: Quantity A) Fixed Quantities Orderi
Page 17 and 18: Deciding which system to choose wil
Page 19 and 20: There are three ways to find the op
Page 21 and 22: Cost (R) The decision whether to ma
Page 23 and 24: STEP 13: STEP 14: STEP 15: STEP 16:
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Page 27 and 28: Current assets are assets with amou
Page 29 and 30: It is important to note that Income
Page 31 and 32: INDIVIDUAL ASSIGNMENT: A small comp
Page 33 and 34: We can distinguish between the foll
Page 35 and 36: 6. CREDITWORTHINESS Students unders
Page 37 and 38: The following should be clear from
Page 39 and 40: 9. CREDIT SECURITIES Students can d
Page 41 and 42: 5. Lien A lien is the right to hold
Page 43 and 44: When evaluating the Growth of a Bus
Page 45 and 46: Investors are either expecting an i
Page 47: 1. Average Assets for Period = (Beg
Page 51 and 52: XYZ LIMITED GROUP INCOME STATEMENT
Page 53 and 54: INDIVIDUAL ASSIGNMENT: You intend t

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