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Finance Management Articles
Page 18 of 96
What is Meant by Earning Power?
Definition of Earning PowerA company’s ability to generate profit from its operation is known as the company’s earning power. In other words, earning power is a company’s capability to generate profit from operations. The generation of profit is compared against the goods and services offered in a particular industry to check the earning power of different companies. Investors usually check the earning power of a company to see whether a company is worth to put the investment in they want in that company.Earnings power is the company’s capability to derive profits from the invested capital in it by the investors. ...
Read MorePrice-Earnings Ratio vs. Earnings Yield Ratio
What is Earnings Yield Ratio?Earnings Yield is the reciprocal of Price-Earnings, and it is expressed as a percentage. Earnings yield is the earnings per share divided by the market price of each share multiplied by 100. Earnings yield ratio offers an insight to the earning power of a share. If the earnings yield of a share is 5%, it means that there is an earning of Rs 5 per 100 rupees of shares owned by an investor.Earnings yield offers investors to check the future earnings of not only shares, but also of bonds, debentures and bank fixed deposits etc.For example, ...
Read MoreWhich Ratios Shareholders are Most Interested in?
There are a lot of financial ratios to measure the relationships between different financial items, and they are useful for various types of calculations. Some ratios are more applicable to measure specific tasks and hence these ratios can be specifically applied to measure specific relationships.For the shareholders who are mostly interested in investing their money in profitable stocks, the following are the ratios that have proved to be most useful.Net Working Capital RatioWorking capital shows a company’s capacity to pay its liabilities with its current assets. Working capital measures the liquidity of a company. In other words, working capital is ...
Read MoreWhat is the Importance of Profitability Ratio?
What is Profit?Profit is the difference between revenues and expenses, and it is the ultimate aim and output of a company. Profit is the fuel that propels businesses. A company must earn enough profits to sustain and grow. In order to make an expansion too, a company must earn enough profits so that it can accumulate earnings and invest them in an expansion project. Investors and lenders invest money in a company to get profitable returns. Without profit, no company can last for a long period of time. So, it is an item no company should avoid.However, it is inappropriate ...
Read MoreIs Profit After-Tax (PAT) the same as Net Asset?
Although Profit After-Tax (PAT) and Net Asset seem to be the same, there is a difference between the two. PAT is related more to the operational efficiency of a firm while net assets are related to the value of assets.The two terms, however, can be misleading. So, in order to make it simpler, let us check the meaning of the two terms in detail.Profit After-Tax (PAT)PAT is the amount a company retains after paying all the non-operating and operating taxes, expenses, and liabilities. This is the profit that is distributed among the shareholders of the company. Alternately, a company may ...
Read MoreHow to Define Investment to Measure the Investment-Related Profitability Ratio?
What is Return on Investment?The profitability ratio related to investment is Return on Investment (ROI). Return on Investment is the ratio that is sometimes expressed as Profit After Tax (PAT) divided by Investment. The investment represents the pool of funds accumulated by components invested by shareholders and lenders.So, the most common assumption of ROI is given as follows −$$\mathrm{ROI\, =\, \frac{PAT}{Investment}}$$However, it is incorrect to use PAT in measuring returns on Income because PAT is the residue income of shareholders. It is not the overall amount of funds invested by the lenders and general shareholders.Also, PAT is affected by a ...
Read MoreExplain discounted cash flow analysis in merger and acquisitions
Discounted cash flow (DCF) analysis tells about the present value of an asset/company, based on the money, which it can make in future. This analysis will estimate the intrinsic value of a company.Current and future performances of a company are taken into consideration. Both inflow and outflow cash flows are discounted to the present value and sum of all the present values of future cash flows are equal to the net present value.CategoriesThe categories of discounted cash flow (DCF) are explained below −Internal forces − Considered as solid data, because raw information (quantitative) is used. Information includes historical performances, current ...
Read MoreWhat is the merger model and the factors considered?
Merger model gives a detailed analysis of possible combinations of companies. Merger model acts as an intensive tool and is used by banks and merger and acquisitions professionals.It is a feasibility study carried before amalgamations. Companies hire investment and valuation professionals to estimate the value. Based on the value, companies make decisions whether to go forward or not.FactorsThe factors considered in merger model are as follows −Purchase considerationsThe main thing to keep in mind is, whether there is an increase in Earnings per share (EPS) or decrease in EPS. Companies must take care that the process does not lead to ...
Read MoreExplain vertical integration in strategic management
Vertical integration means one company takes control over another company or companies who are in the same product (either in distribution or in production) to gain control over the total chain of product.Companies prefer this type of integration because the supplier is unreliable, high prices may be charged, to earn more margins and for a significant growth of industry.Types of vertical integrationThe types of vertical integration are as follows −Backward integration − When a company gains control over the raw material supply company.Forward integration − When a company gains control over a distribution/logistic company.Balance integration − Mixture of both forward ...
Read MoreExplain the concept of takeover in business
Takeover is the process of acquiring a control over another business unit by controlling their assets, either directly or indirectly.Generally, takeovers are done by either hostile or friendly approach. They are common in larger business units and help the external growth of a business.ReasonsThe reasons for a takeover in a business are as follows −Market share.Increase intangible assets.Diversification.Decrease competition.TypesThe types of takeovers are as follows −Friendly takeover − Takeover is done after negotiations and agreements.Hostile takeover − Takeover is done by buying the required number of shares in a targeted company in an open market.Bailout takeover − Takeover is done ...
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