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AFA
Block 2.4 - profitability, growth and self-financing
| Question | Answer |
|---|---|
| what is profitability? | - accompanied by indicators that make decisions - allows to relate what's generated through income statement with what is needed to develop business activity (assets/own capital) - evaluate convenience of maintaining an investment in company |
| what are the 2 types of profitability? | economic - company investment, affects EBIT, concerns CA & NCA financial - shareholder investment, affects net profit, concerns net equity |
| what does economic profitability tell us? | - EBIT evaluates the result generated by asset - economic return > average financing cost - positive = profit covers cost - negative = debt & dividends not met = margin = efficiency; rotation measures investments ability to generate operating income |
| what does financial profitability tell us? | - tells us profitability of own funds & relationship with opportunity cost - measures net profit in relation to owners investment - magnitude used in EBITDA as results usually related to sales to indicate net margin before necessary non-daily expenses |
| how do you increase profitability? | 1. increase the margin = raising prices, boost sales, reducing costs 2. increase rotation/turnover = sell more, reduce assets 3. increase debt ratio = increase debt, assets over net equity increases |
| what are other profitability indicators? | - to measure the viability of the company in the long-term - tools for projection of results = serve for better planning, budgeting & control |
| what is financial leverage? | effect of profitability when debt is used in the structure - to analyse the relationship between debt and equity, & the effect of financial expenses on results - positive = increase debt = increase profitability = greater value for shareholders |
| what are reasons to use debt? | 1. creates barrier against inflation, give rise to price level gains 2. interest cost of debt is fixed - if lower than return on funds, difference is accumulated for benefit of own funds 3. interest is a tax deductible expense 4. rising interest rates |
| when can the use of debt be bad? | excess debt = can't pay = greater risk = only advised to increase debt if indebtedness is acceptable to allow the company to maintain is it solvency |
| what are circumstances that favour positive leverage? | - higher operating profit/ high margin - low cost of debt - small assets - a lot of turnover |
| how do you calculate the average financing cost? | total financial cost/ average financial balance |
Created by:
patriciam03
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