Contents
PART ONE: THE ART OF FINANCE (AND WHY IT MATTERS)
1. You Can’t Always Trust the Numbers
Bạn không thể lúc nào cũng tin vào những con số
“The art of accounting and finance is the art of using limited data to come as close as possible to an accurate description of how well a company is performing“. Accounting and finance are not reality, they are a reflection of reality, and the accuracy of that reflection depends on the ability of ac- countants and finance professionals to make reasonable assumptions and to calculate reasonable estimates.
Income Statement: The income statement shows revenues, expenses, and profit for a period of time, such as a month, quarter, or year. It’s also called a profit and loss statement, P&L, statement of earnings, or statement of operations. Sometimes the word consolidated is thrown in front of those phrases, but it’s still just an income statement. The bottom line of the income statement is net profit, also known as net income or net earnings.
Operating Expenses: Operating expenses are the costs required to keep the business going from day to day. They include salaries, benefits, and insurance costs, among a host of other items. Operating expenses are listed on the income statement and are subtracted from revenue to determine profit.
Capital Expenditures: A capital expenditure is the purchase of an item that’s considered a long-term investment, such as computer systems and equipment. Most companies follow the rule that any purchase over a certain dollar amount counts as a capital ex- penditure, while anything less is an operating expense. Operating expenses show up on the income statement, and thus reduce profit. Capital expenditures show up on the balance sheet; only the depreciation of a piece of capital equipment appears on the income statement. More on this in chapters 5 and 11.
2. Spotting Assumptions, Estimates, and Biases
Xác định những giả định, ước tính và thiên kiến
Accurals and Allocations:
Accruals: An accrual is the portion of a revenue or expense item that is recorded in a particular time span. Product development costs, for instance, are likely to be spread out over several accounting periods, and so a portion of the total cost will be accrued each month. The purpose of accruals is to match costs to revenues in a given time period as accurately as possible.
Allocations: Allocations are apportionments of costs to different departments or activities within a company. For instance, overhead costs such as the CEO’s salary are often allocated to the company’s operating units.
Depreciation: Depreciation is the method accountants use to allocate the cost of equipment and other assets to the total cost of products and services as shown on the income statement. It is based on the same idea as accruals: we want to match as closely as possible the costs of our products and services with what was sold. Most capital investments other than land are depreciated. Accountants attempt to spread the cost of the expenditure over the useful life of the item. There’s more about depreciation in parts 2 and 3.
3. Why Increase Your Financial Intelligence?
Tại sao phải tăng cường trí tuệ tài chính?
The Benefits of Financial Intelligence:
– Increased Ability to Critically Evaluate Your Company,
– Better Understanding of the Bias in the Numbers,
– The Ability to Use Numbers and Financial Tools to Make and Analyze Decisions
How it Benefits a Company:
– Strength and Balance Throughout the Organization,
– Better Decisions,
– Greater Alignment
4. The Rules Accountants Follow — and Why You Don’t Always Have To
Các quy tắc kế toán phải tuân thủ – và lý do bạn không phải luôn luôn tuân thủ
The Key Principles:
– Monetary Units and Historical Cost: This principle states that all items in financial statements are expressed in monetary units, such as dollars, euros, or whatever. It also says that the price a company paid for an asset, which accountants call historical cost, is the basis for determining its value.
– Conservatism: Conservatism in accounting means, for example, that when a company expects a loss, the loss must show up in the financial statements as soon as it can be quantified.
– Consistency: Once a company selects a particular method or assumption, however, it should continue to use that method or assumption unless something in the business warrants a change.
– Full Disclosure: Full disclosure relates to the consistency. If a company changes an accounting method or assumption and the change has a mate- rial impact (more on “material” in a minute), then it must disclose both the change and the financial effects of that change.
– Materiality: Material in accountant-speak means something significant—something that would affect the judgment of an informed investor about the com- pany’s financial situation. Every material event or piece of information must be disclosed, typically in the footnotes of financial statements.
PART TWO: THE (MANY) PECULIARITIES OF THE INCOME STATEMENT
NHỮNG ĐẶC THÙ CỦA BÁO CÁO KẾT QUẢ KINH DOANH
5. Profit Is an Estimate
Lợi nhuận là một ước tính
In principle, the income statement tries to measure whether the prod- ucts or services that a company provides are profitable when everything is added up. It’s the accountants’ best effort to show the sales the company generated during a given time period, the costs incurred in making those sales (including the costs of operating the business for that span of time), and the profit, if any, that is left over. Possible bias aside, this is a critically important endeavor for nearly every manager in a business.
The Matching Principle: is a fundamental accounting rule for preparing an in- come statement. It simply states, “Match the cost with its associated revenue to determine profits in a given period of time—usually a month, quarter, or year.” In other words, one of the accountants’ primary jobs is to figure out and properly record all the costs incurred in generating sales.
6. Cracking the Code of the Income Statement
Giải mã báo cáo kết quả kinh doanh
Reading an Income Statement:
– The Label: Does it say “income statement” at the top? It may not. It may instead say “profit and loss statement” or “P&L statement,” “operating statement” or “statement of operations,” “statement of earnings” or “earnings statement.” All these terms refer to the same document. Often the word consolidated appears as part of the title.
– What It’s Mearsuring: Creating income statements for smaller business units has provided managers in large corporations with enormous insights into their units’ financial performance. Remember that these divi- sion or business-unit financial statements usually require allocations or estimates for costs that apply to more than one division or unit.
– “Actual” versus “Pro Forma”: Most income statements are actual, and if there’s no other label, you can assume that is what you’re looking at. They show what “actually” happened to revenues, costs, and profits during that time period.
– The Big Numbers: sales/revenue, profit/surplus/deficit, COGS, COS.
– Comparative Data: The consolidated income statements presented in annual reports typically have three columns of figures, reflecting what happened during the past three years. Internal income statements may have many more columns.
– Footnotes: Why all the footnotes? In cases where there is any question, the rules of accounting require the financial folks to explain how they arrived at their totals. So most of the notes are like windows into how the numbers were determined.
One Big Rule: Remember that many numbers on the income statement reflect estimates and assumptions. Accountants have decided to include some transac- tions here and not there. They have decided to estimate one way and not another.
7. Revenue: The Issue Is Recognition
Doanh thu: Vấn đề là ở việc ghi nhận
Sales: Sales or revenue is the dollar value of all the products or services a company provided to its customers during a given period of time.
8. Costs and Expenses: No Hard-and-Fast Rules
Chi phí và vốn: Không có quy tắc bất di bất dịch
Cost of Goods Sold (COGS) and Cost of Services (COS): Cost of goods sold or cost of services is one category of expenses. It includes all the costs directly involved in producing a product or delivering a service.
In a manufacturing company, for in- stance, the following costs are definitely in:
• The wages of the people on the manufacturing line
• The cost of the materials that are used to make the product
And plenty of costs are definitely out, such as:
• The cost of supplies used by the accounting department (paper, etc.)
• The salary of the human resources manager in the corporate office
Operating Expenses: What’s Necessary?
Some companies refer to operating expenses as sales, general, and administrative expenses (SG&A, or just G&A), while others treat G&A as one subcategory and give sales and marketing its own line. Often a company will base this distinction on the relative size of each.
Operating expenses are often thought of and referred to as “overhead.” The category includes items such as rent, utilities, telephone, research, and marketing. It also includes management and staff salaries—HR, account- ing, IT, and so forth—plus everything else that the accountants have de- cided does not belong in COGS.
The Power of Depreciation and Amortization
Another part of operating expenses that is often buried in that SG&A line is depreciation and amortization.
Depreciation is a prime example of what accountants call a noncash expense.
Amortization is the same basic idea as depreciation, but it applies to intangible assets. These days, intangible assets are often a big part of companies’ balance sheets. Items such as patents, copyrights, and goodwill (to be explained in chapter 11) are all assets—they cost money to acquire, and they have value—but they aren’t physical assets like real estate and equip- ment. Still, they must be accounted for in a similar way.
One-time charges: A Yelloe Flag
You may occasionally have seen the phrase taking the big bath or some- thing similar in the Wall Street Journal. That’s a reference to these one-time charges, which are also known as extraordinary items, write-offs, write- downs, or restructuring charges.
9. The Many Forms of Profit
Nhiều hình thức lợi nhuận
Gross Profit
Gross profit is sales minus cost of goods sold or cost of services. It is what is left over after a company has paid the direct costs incurred in making the product or delivering the service. Gross profit must be sufficient to cover a business’s operating expenses, taxes, financing costs, and net profit.
Gross profit can be greatly affected by decisions about when to recognize revenue and by decisions about what to include in COGS.
Operating Profit, or EBIT
Operating profit is gross profit minus operating expenses, which include depre- ciation and amortization. In other words, it shows the profit made from running the business.
Operating profit, or EBIT, is a good gauge of how well a company is being managed. It’s watched closely by all stakeholders because it measures both overall demand for the company’s products or services (sales) and the company’s efficiency in delivering those products or services (costs). Bankers and investors look at operating profit to see whether the company will be able to pay its debts and earn money for its shareholders.
Net Profit
Net profit is the bottom line of the income statement: what’s left after all costs and expenses are subtracted from revenue. It’s operating profit minus interest expenses, taxes, one-time charges, and any other costs not included in operating profit.
Contribution Margin
Contribution margin indicates how much profit you are earning on the goods or services you sell, without accounting for your company’s fixed costs. To calculate it, just subtract variable costs from sales.
Contribution margin is sales minus variable costs. It shows the profit you are earning on what you sell before you account for fixed costs. Re- member what we discussed in chapter 8: variable costs are not the same as COGS or COS. So contribution margin is not the same as gross profit.
PART THREE: THE BALANCE SHEET REVEALS THE MOST
BẢNG CÂN ĐỐI KẾ TOÁN TIẾT LỘ NHIỀU THÔNG TIN NHẤT
10. Understanding Balance Sheet Basics
Hiểu những điều căn bản về bảng cân đối kế toán
Understanding the balance sheet means under- standing all the assumptions, decisions, and estimates that go into it. Like the income statement, the balance sheet is in many respects a work of art, not just a work of calculation.
11. Assets: More Estimate and Assumptions (Except for Cash)
Tài sản: Thêm các ước tính và giả định (trừ tiền mặt)
Types of Asset:
– Cash and Cash Equivalents: Money in the bank. Money in money-market ac- counts. Also publicly traded stocks and bonds—the kind you can turn into cash in a day or less if you need to. Another name for this category is liquid assets.
– Accounts Receivable, or A/R: This is the amount customers owe the company. Remember, revenue is a promise to pay, so accounts receivable includes all the promises that haven’t yet been collected. Why is this an asset? Because all or most of these com- mitments will convert to cash and soon will belong to the company. Sometimes a balance sheet includes an item labeled “allowance for bad debt” that is subtracted from accounts receivable. This is the accountants’ estimate—usually based on past experience—of the dollars owed by cus- tomers who don’t pay their bills.
– Inventory: Merchandise inventories are stated at the lower of cost or market. Cost is determined primarily by the retail inventory method under both the first-in, first-out (FIFO) basis and the last-in, first-out (LIFO) basis.
– Property, Plant, and Equipment (PPE): This line on the balance sheet includes buildings, machinery, trucks, com- puters, and every other physical asset a company owns. The PPE figure is the total number of dollars it cost to buy all the facilities and equipment the company uses to operate the business. Note that the relevant cost here is the purchase price.
– Goodwill: Goodwill is found on the balance sheets of companies that have acquired other companies. It’s the difference between what a company paid for an- other company and what the physical assets of the acquired company are worth.
– Intellectual Property, Patents, and Other Intangibles
– Accruals and Prepaid Assets
12. On the Other Side: Liabilities and Equity
Phía bên kia bảng cân đối kế toán: Nợ phải trả và vốn chủ sở hữu
Types of Liabilities:
– Current Portion of Long-Term Debt: If your company owes $100,000 to a bank on a long-term loan, maybe $10,000 of it is due this year. So that’s the amount that shows up in the current liabilities section of the balance sheet. The line will be labeled “cur- rent portion of long-term debt” or something like that. The other $90,000 shows up under long-term liabilities.
– Short-Term Loans: These are lines of credit and short-term revolving loans. These short-term credit lines are usually secured by current assets such as accounts receiv- able and inventory. The entire balance outstanding is shown here.
– Accounts Payable: Accounts payable shows the amount the company owes its vendors. The company receives goods and services from suppliers every day and typi- cally doesn’t pay their bills for at least thirty days. The vendors, in effect, have loaned the company money. Accounts payable shows how much was owed on the date of the balance sheet. Any balance on a company’s credit cards is usually included in accounts payable.
– Accrued Expenses and Other Short-Term Liabilities: This catch-all category includes everything else the company owes. One example is payroll.
– Deferred Revenue: Some companies have an item called deferred revenue on their balance sheets. Deferred revenue represents money received for products or services that have not yet been delivered. So it’s an obligation.
– Long-Term Liabilities: Most long-term liabilities are loans. But there are also other liabilities that you might see listed here. Examples include deferred bonuses or compen- sation, deferred taxes, and pension liabilities. If these other liabilities are substantial, this section of the balance sheet needs to be watched closely.
Owners’ Equity:
– Preferred Shares: Preferred shares—also known as preference stock or shares—are a specific type of stock. People who hold preferred shares usually receive dividends on their investment before the holders of common stock get a nickel. But preferred shares typically carry a fixed dividend, so their price doesn’t fluc- tuate as much as the price of common shares. Investors who hold pre- ferred shares may not receive the full benefit of a company’s growth in value. When the company issues preferred shares, it sells them to investors at a certain initial price. The value shown on the balance sheet reflects that price.
– Common Shares or Common Stock: Unlike most preferred shares, common shares usually carry voting rights. People who hold them can vote for members of the board of directors (usually one share, one vote) and on any other matter that may be put be- fore the shareholders. Common shares may or may not pay dividends. The value shown on the balance sheet is based on the issuing price of the shares; it’s shown as “par value” and “paid-in capital.”
– Retained Earnings: Retained earnings or accumulated earnings are the profits that have been reinvested in the business instead of being paid out in dividends. The number represents the total after-tax income that has been reinvested or retained over the life of the business.
13. Why the Balance Sheet Balances
Tại sao bảng cân đối kế toán lại cân đối
As long as you remember the fundamental fact that transactions affect both sides of the balance sheet, you’ll be OK. That’s why the balance sheet balances. Understanding this point is a basic building block of financial intelligence. Remember, if assets don’t equal liabilities and equity, you do not have a balance sheet.
14. The Income Statement Affects the Balance Sheet
Báo cáo kết quả kinh doanh ảnh hưởng đến bảng cân đối kế toán
PART FOUR: CASH IS KING
TIỀN MẶT LÀ VUA
15. Cash Is a Reality Check
Why target cash flow as a key measure of business perfor- mance? Why not just profit, as found on the income statement? Why not just a company’s assets or owners’ equity, as revealed by the balance sheet? For one thing, profit is not the same as cash, as we explain in chapter 16. Profit is based on promises, not money coming in. So if you want to know whether your company has cash to pay employees, pay its bills, and even invest in equipment, you need to study cash flow.
16. Profit ≠ Cash (and You Need Both)
Lợi nhuận khác với tiền mặt (và bạn cần cả hai)
Some reasons are pretty obvious: cash may be coming in from loans or from inves- tors, and that cash isn’t going to show up on the income statement at all. But even operating cash flow, which we’ll explain in detail in chap- ter 17, is not at all the same as net profit. There are three essential reasons:
• Revenue is booked at sale: One reason is the fundamental fact that we explained in our discussion of the income statement. A sale is recorded whenever a company delivers a product or service. Since profit starts with revenue, it always reflects customers’ promises to pay. Cash flow, by contrast, always reflects cash transactions.
• Expenses are matched to revenue: The purpose of the income state- ment is to tote up all the costs and expenses associated with generating revenue during a given time period. So the expenses on the income statement do not reflect cash going out. The cash flow statement, however, always measures cash in and out the door during a particular time period.
• Capital expenditures don’t count against profit: A capital expenditure doesn’t appear on the income statement when it occurs; only as the item depreciates is its cost charged against revenue. So a company can buy trucks, machin- ery, computer systems, and so on, and the expense will appear on the income statement only gradually, over the useful life of each item. Cash, of course, is another story: all those items often are paid for long before they have been fully depreciated, and the cash used to pay for them will be reflected in the cash flow statement.
Understanding the difference between profit and cash is a key to increasing your financial intelligence. For example:
• Finding the right kind of expertise: If a company is profitable but short on cash, then it needs financial expertise—someone capable of lining up additional financing. If a company has cash but is unprofitable, it needs operational expertise, meaning someone capable of bringing down costs or generating additional revenue without adding costs.
• Making good decisions about timing: Informed decisions on when to take an action can increase a company’s effectiveness.
17. The Language of Cash Flow
Ngôn ngữ của dòng tiền
Types of Cash Flow:
– Cash From or Used in Operating Activities: or “cash provided by or used for operating activities.” This category includes all the cash flow, in and out, that is related to the actual operations of the business. It includes the cash customers send in when they pay their bills. It includes the cash the company pays out in salaries, to vendors, and to the landlord, along with all the other cash it must spend to keep the doors open and the business operating.
– Cash From or Used in Investing Activities: Investing activities in this context refers to investments made by the company, not by its owners. A key subcategory here is cash spent on capital investments—that is, the purchase of assets. If the company buys a truck or a machine, the cash it pays out shows up on this part of the statement. Conversely, if the company sells a truck or a machine (or any other asset), the cash it receives shows up here. This section also includes investment in acquisitions or financial securities—anything, in short, that involves the buying or selling of company assets.
– Cash From or Used in Financing Activities: Financing refers to borrowing and paying back loans on the one hand, and transactions between a company and its shareholders on the other. So if a company receives a loan, the proceeds show up in this category. If a com- pany gets an equity investment from a shareholder, that, too, shows up here.
18. How Cash Connects with Everything Else
Tiền mặt kết nối với mọi thứ khác như thế nào
Reconciliation (đối chiếu): In a financial context, reconciliation means getting the cash line on a company’s balance sheet to match the actual cash the company has in the bank—sort of like balancing your checkbook, but on a larger scale.
Phần nền nên xem ví dụ thực tế trong sách để hiểu cách tiền mặt kết nối các thành phần trong bảng cân đối kế toán như thế nào.
19. Why Cash Matters
Tại sao tiền mặt lại quan trọng
Operating Cash Flow:
– Account Receivables,
– Invetory,
– Expenses,
– Giving credit (bán chịu)
PART FIVE: RATIOS: LEARNING WHAT THE NUMBERS ARE REALLY TELLING YOU
CÁC TỶ LỆ – TÌM HIỂU CÁC CON SỐ ĐANG THẬT SỰ KỂ GÌ CHO BẠN
20. The Power of Ratios
Sức mạnh của tỷ lệ
All kinds of people use all kinds of financial ratios in assessing a busi- ness. For example:
– Bankers and other lenders examine ratios such as debt-to-equity, which gives them an idea of whether a company will be able to pay back a loan.
– Senior managers watch ratios such as gross margin, which helps them be aware of rising costs or inappropriate discounting.
– Credit managers assess potential customers’ financial health by inspecting the quick ratio, which gives them an indication of the customer’s supply of ready cash compared with its current liabilities.
– Potential and current shareholders look at ratios such as price-to- earnings, which helps them decide whether a company is valued high or low by comparison with other stocks (and with its own value in previous years).
21. Profitability Ratios: The Higher the Better (Mostly)
Các chỉ số về khả năng sinh lời: (Hầu hết) càng cao càng tốt
Gross Profit Margin Percentage – Biên lợi nhuận gộp:
Gross margin shows the basic profitability of the product or service it- self, before expenses or overhead are added in. It tells you how much of ev- ery sales dollar you get to use in the business—22.2 cents in this example— and (indirectly) how much you must pay out in direct costs (COGS or COS), just to get the product produced or the service delivered. (COGS or COS is 77.8 cents per sales dollar in this example.) It’s thus a key measure of a company’s financial health.
Operating Profit Margin Percentage – Biên lợi nhuận hoạt động: is a more compre- hensive measure of a company’s ability to generate profit
Operating margin is a good indicator of how well managers as a group are doing their jobs.
Net Profit Margin Percentage – Biên lợi nhuận ròng: tells a company how much out of every sales dollar it gets to keep after everything else has been paid for—people, vendors, lenders, the government, and so on. It is also known as return on sales, or ROS.
The best point of comparison for net margin is a company’s performance in previous time periods and its performance relative to similar companies in the same industry.
Return On Assest – Tỷ số lợi nhuận trên tài sản: tells you what percentage of every dollar invested in the business was returned to you as profit.
An ROA that is considerably above the industry norm may suggest that the company isn’t renewing its asset base for the future— that is, it isn’t investing in new machinery and equipment.
Return On Equity – Tỷ số lợi nhuận trên vốn chủ sở hữu: tells us what percentage of profit we make for every dollar of equity invested in the company.
Depending on in- terest rates, an investor can probably earn 2, 3, or 4 percent on a treasury bond, which is about as close to a risk-free investment as you can get.
RONA, ROTC, ROIC, AND ROCE – return on net assets (RONA), return on to- tal capital (ROTC), return on invested capital (ROIC), and return on capital employed (ROCE)
22. Leverage Ratios: The Balancing Act
Các chỉ số đòn bẩy: Hành động cân bằng
Debt to Equity – Tỷ lệ nợ trên vốn chủ sở hữu: tells how much debt the company has for every dollar of shareholders’ equity
What’s a good debt-to-equity ratio? As with most ratios, the answer depends on the industry. But many, many companies have a debt-to-equity ratio considerably larger than 1—that is, they have more debt than equity.
Bankers love the debt-to-equity ratio. They use it to determine whether or not to offer a company a loan.
Interest Coverage – Tỷ lệ thanh toán lãi vay: measure of how much interest it has to pay every year.
This ratio shows how easy it will be for the company to pay its interest. A ratio that gets too close to 1 is obviously a bad sign: most of a company’s profit is going to pay off interest! A high ratio is generally a sign that the company can afford to take on more debt—or at least that it can make the payments.
23. Liquidity Ratios: Can We Pay Our Bills?
Các chỉ số thanh khoản: Liệu chúng ta có thể thanh toán các hoá đơn?
Current Ratio – Hệ số thanh khoản ngắn hạn: measures a company’s current assets against its current liabilities.
Most bankers aren’t going to lend money to a company with a current ratio anywhere near 1. Less than 1, of course, is way too low, regardless of how much cash you have in the bank. With a current ratio of less than 1, you know you’re going to run short of cash sometime during the next year
Quick Ratio – Hệ số thanh khoản nhanh: Show how easy it would be for a company to pay off its short-term debt without waiting to sell off inventory or convert it into product.
24. Efficiency Ratios: Making the Most of Your Assets
Các chỉ số về tính hiệu quả: Hình thành nên hầu hết các tài sản của bạn
Inventory Days and Turnover – Thời gian xử lý hàng tồn kho và Vòng quay hàng tồn kho:
Days in Inventory – thời gian xử lý hàng tồn kho: measures the number of days inventory stays in the system.
Inventory turns – vòng quay hàng tồn kho: measure of how many times inventory turns over in a year.
Days Sales Outstanding – Thời gian thu hồi hàng tồn động: measure of the average time it takes to collect the cash from sales—in other words, how fast customers pay their bills.
Days Payable Outstanding – Thời gian phải trả nhà cung cấp: shows the average number of days it takes a company to pay its own outstanding invoices.
Property, Plant, and Equipment Turnover – Vòng quay bất động sản, nhà xưởng và thiết bị: tells you how many dollars of sales your company gets for each dollar invested in property, plant, and equipment (PPE). It’s a measure of how efficient you are at generating revenue from fixed assets such as build- ings, vehicles, and machinery.
Total Asset Turnover – Vòng quay tổng tài sản: Total asset turnover gauges not just efficiency in the use of fixed assets, but efficiency in the use of all assets.
25. The Investor’s Perspective: The “Big Five” Numbers and Shareholder Value
Quan điểm của nhà đầu tư: Năm số lên và Giá trị cổ đông
Wall Street and other outside investors are really looking at five key metrics when they assess a company’s financial performance or its attractiveness as an investment. You can think of these measures as the Big Five. When all five are moving in the right direction, it’s a safe bet that investors will favor the company’s prospects.
The Big Five are:
– Revenue growth from one year to the next,
– Earnings per share (EPS),
– Earnings before interest, taxes, depreciation, and amortization (EBITDA),
– Free cash flow (FCF),
– Return on total capital (ROTC) or return on equity (ROE). ROE is the right metric for financial businesses such as banks and insurance companies.
(1) Revenue Growth Year Over Year – How much growth is reasonable? It depends on the company, the in- dustry, and the economic situation. Some high-tech companies—Google is an example—go through periods of explosive growth. Most growth- oriented companies expand far more slowly; a growth rate of 10 percent a year, sustained over time, is remarkably good.
(2) Earnings Per Share – EPS is often the first number companies report to investors in their quar- terly earnings calls. It is simply the company’s net income for the quarter or year divided by the average number of shares outstanding during the period. Investors expect increases in EPS over time, just as they do with rev- enue. Other things being equal, a growing EPS presages an increasing stock price.
(3) Earnings before interest, taxes, depreciation, and amortization – EBITDA is an impor- tant measure because investors and bankers view it as a good indicator of future operating cash flow. Lenders like it because it can help them assess a company’s ability to repay its loans. Shareholders like it because it is a measure of cash earnings before the accountants have added in noncash expenses such as depreciation.
(4) Free Cash Flow – If a company’s free cash flow is healthy and growing, investors can be pretty sure that it is doing well and that its stock price will rise over time. Moreover, a company with a healthy free cash flow can finance its own growth even when investment or debt capital is hard to come by.
(5) Return on total capital or return on equity – ROTC isn’t a good indicator of its performance because a bank’s debt to its depositors is part of its business, not part of its capital. ROE is a far better gauge of performance.
PART SIX: HOW TO CALCULATE (AND REALLY UNDERSTAND) RETURN ON INVESTMENT
CÁCH TÍNH TOÁN (VÀ THẬT SỰ HIỂU) VỀ LỢI TỨC ĐẦU TƯ
26. The Building Blocks of ROI
Các yếu tố trong công thức tính lợi tức đầu tư
Future Value – Future value is what a given amount of cash will be worth in the future if it is loaned out or invested.
Present Value – Present-value concepts are widely used to evaluate investments in equipment, real estate, business opportunities, even mergers and acqui- sitions.
Required Rate of Return –
27. Figuring ROI: The Nitty-Gritty
Tính toán lợi tức đầu tư: Thực chất của vấn đề
Analyzing capital expenditures:
– Step 1 in analyzing a capital expenditure is to determine the initial cash outlay (xác định ngân sách tiền mặt ban đầu). Even this step involves estimates and assumptions: you must make judgments about what a machine or project is likely to cost before it begins to generate revenue.
– Step 2 is to project future cash flows (dự kiến dòng tiền mặt tương lai) from the investment.
– Step 3, finally, is to evaluate the future cash flows (đánh giá dòng tiền tương lai) —to figure the return on investment. Finance professionals typically use three different methods—alone or in combination—for deciding whether a given expenditure is worth it: the payback method, the net present value (NPV) method, and the internal rate of return (IRR) method.
Learning the three methods
– Payback method: simplest way to evaluate the future cash flow from a capital expenditure. It measures the time required for the cash flow from the project to return the original investment—in other words, it tells you how long it will take to get your money back. Payback should be used only to compare projects or to reject projects.
– Net Present Value method: The net present value method is more complex than payback, but it’s also more powerful; indeed, it’s usually the finance professional’s first choice for analyzing capital expenditures. The reasons? One, it takes into account the time value of money, discounting future cash flows to obtain their value right now. Two, it considers a business’s cost of capital or other hurdle rate. Three, it provides an answer in today’s dollars, thus allowing you to compare the initial cash outlay with the present value of the return.
Some companies may expect you to run an NPV calculation using more than one discount rate. If you do, you’ll see the following relationship:
As the interest rate increases, NPV decreases.
As the interest rate decreases, NPV increases.
– Interal Rate of Return method – IRR is an easy method to explain and present, because it allows for a quick comparison of the project’s return to the hurdle rate.
PART SEVEN: APPLIED FINANCIAL INTELLIGENCE: WORKING CAPITAL MANAGEMENT
ỨNG DỤNG TRÍ TUỆ TÀI CHÍNH VÀO THỰC TẾ QUẢN LÝ VỐN LƯU ĐỘNG
28. The Magic of Managing the Balance Sheet
Phép thuật quản lý bảng cân đối kế toán
The elements of Working captial:
Working capital is a category of resources that includes cash, inventory, and receivables, minus whatever a company owes in the short term. It comes straight from the balance sheet, and it’s often calculated according to the following formula:
“working capital = current assets – current liabilities“
Measuring Working Captial:
Companies generally look at three main components when measuring working capital: accounts receivable, inventory, and accounts payable. A change in any of these elements either increases or decreases working capi- tal, as follows:
– Accounts receivable is the use of cash to finance customers’ purchases, so an increase in A/R increases working capital.
– Inventory is the use of cash to purchase and stock inventory for sale to customers, so an increase in inventory also increases working capital.
– Accounts payable, though, is money owed to others, so an increase in A/P decreases working capital.
Overall, how much working capital is appropriate for a company? This question doesn’t allow an easy answer. Every company needs enough cash and inventory to do its job. The larger it is and the faster it is growing, the more working capital it is likely to need. But the real challenge is to use working capital efficiently.
29. Your Balance Sheet Levers
Các đòn bẩy trên bảng cân đối kế toán
Manageing DSO
Managing Inventory
30. Homing In on Cash Conversion
Trở lại việc chuyển đổi tiền mặt
The Cash Conversion Cycle– Another way to understand working capital is to study the cash conversion cycle. It’s essentially a timeline relating the stages of production (the oper- ating cycle) to the company’s investment in working capital. The timeline has three levels, and you can see how the levels are linked in figure 30-1. Understanding these three levels and their measures provides a power- ful way of understanding the business. It should help you make good decisions.
cash conversion cycle = DSO + DII – DPO
PART EIGHT: CREATING A FINANCIALLY INTELLIGENT COMPANY
XÂY DỰNG CÔNG TY CÓ TRÍ TUỆ TÀI CHÍNH
31. Financial Literacy and Corporate Performance
Hiểu biết về tài chính và hiệu quả hoạt động của doanh nghiệp
32. Financial Literacy Strategies
Các chiến lược xoá mù tài chính
Small-Company tools and techniques
– Training (over and over): Offer these classes on a regular basis, maybe once a month. Let people attend two or three times if they want—it often takes that long for folks to get it. Encourage 100 percent attendance among your direct reports. Create an environment that tells the participants you believe they are an important part of the success of the company and that you want their in- volvement. Eventually, you can ask other people to teach the class—that’s a good way for them to learn the material, and their teaching styles might be different enough from yours that they’re able to reach people whom you can’t.
– Weekly “Numbers” Meetings
– Reinforcements: Scoreboards and Other visual aids
Building financial intelligence in large companies
– Leadership support,
– Assumptions and follow-up,
– The practicalities
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