Finance Foundations 2017945902
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Broad definition of Finance: Finance is identifying necessary resources(What to buy),
Determine how to get funding(Getting money to buy those things), managing those
assets.
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Balance Sheet
o Asset= Liabilities + Equity(Retained Earning and Shareholder)
o This has a simple meaning, how can the company buy the assets, they either have to
borrow it or take from shareholders.
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Financial Ratios
o Debt Ratio: (Usually between 50 to 60 %)
 Total Liabilities/ Total Assets. (What percentage of total assets is bought
through liabilities.
 Leverage: The amount of money borrowed to buy assets rather vs. getting it
from shareholders.
o Current Ratio: (Ideal between 2:1)
 Ability of the company to pay its obligations in short term
 Current assets/ Current liabilities.
o Return on Sales:
 It is also known as profit margin, It shows the profitability of the business.
 Net Income/Total sales
o Asset Turnover Ratio:
 It is a measure of efficiency, for 1 dollar of asset, how many dollars of sales can
the company generate.
 Sales/Total assets
o Return on equity: (good if between 10 to 20%)(Best if above 20%)(bad if below 10%)
 Measure of overall profitability of the shareholders’ investment. Return on
equity (ROE) is a financial ratio that shows how well a company is managing the
capital that shareholders have invested in it.
 To calculate ROE, one would divide net income by shareholder equity.
o Price -Earnings Ratio: (good if between 10 to 30%)
 Measure of Growth Potential, earning stability, and management capabilities.
 Expected Future earning growth
 Market value of share/net income
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Capital asset pricing model
o Risk free rate + (Equity risk premium*Beta) = Expected Return
o Return on investment should be greater than risk free rate plus an equity risk premium