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Earnings per Share (EPS)

Earnings per Share (EPS) Definition

The earnings per share or EPS is the amount of profit that accrues to each shareholder based on their percentage ownerships or amount of shares owned within the company.

Earnings per Share (EPS) Explained

The earnings per share ratio is often a good measure of how a company is doing from year to year and is used by many investors in the market. However, companies know that the EPS is often a measure of how they are handling their businesses. This leads several companies to manipulate the EPS ratio. The ratio can be manipulated if the company were to buy or sell its own shares in the market, referred to as Treasury Stock. The net income aspect can also be manipulated through the recognition of revenue as well as other ways.

Earnings per Share (EPS) Formula

The EPS equation is as follows:
(Net Income – Preferred Dividends)/Shares Outstanding

Earnings per Share (EPS) Example

Tim is trying to calculate the EPS for Wawadoo Inc. He was given the following information to solve the problem.

Operating Income – $350,000
Interest expense – $20,000
Tax rate – 34%
Shares outstanding – 100,000 common (no preferred)

Tim will make the EPS calculation as follows:
$350,000 – (350,000 * .34) – $20,000 = $211,000 = Net Income
$211,000/100,000 = $2.11/share = EPS

See Also:
Price Earnings Growth Ratio Analysis
Price Earnings Ratio Analysis
Gross Profit Margin Ratio Analysis
Net Profit Margin Analysis
Financial Ratios

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Debt Service Coverage Ratio

See also:
Operating Income (EBIT)
Financial Ratios
EBITDA Definition
Loan Agreement
Time Interest Earned Ratio Analysis
Net Income
Benchmarking
Fixed Charge Coverage Ratio
Times Interest Earned Ratio
Free Cash Flow

Debt Service Coverage Ratio

The debt service coverage ratio (DSCR) is a financial ratio that measures the company’s ability to pay their debts. In broad terms the DSCR is defined as the cash flow of the company divided by the total debt service.

A DSCR > 1.0 indicates that the company is generating sufficient cash flow to pay their debts. A DSCR < 1.0 should be a cause for concern because it indicates that the company is negatively cash flowing.

Debt Service Coverage Ratio formula:

DSCR calculation = EBIT divided by (interest + (principal/ 1-tax rate)

In some cases in calculating the debt service coverage ratio EBITDA is used instead of EBIT since EBITDA is a closer approximation of cash flow. When calculating the debt service ratio denominator leases should be included along with other debt service costs.

Debt Service Coverage Ratio (DSCR) example:

Assumptions:
Net Income = $643,800 Interest Expense = $240,000 Taxes = $331,655 Principal Payments = $300,000 Tax Rate = 34%

DSCR numerator = EBIT = $643,800 + $240,000 + $331,655 = $1,215,455

DSCR denominator = interest + (principal payments / (1-tax rate)) = $240,000 + ($300,000 / (1-34%) = $695,545

DSCR = $1,215,455 / $695,545 = 1.75

Uses of Debt Service Coverage Ratio:

The DSCR is used as a financial tool for trend analysis. By following the increase or decrease of the DSCR over time a company can determine if they are building liquidity in the business. Benchmarking the DSCR against other companies in similar industries is useful in setting goals for the corporation to attain.

Finally, the DSCR is often used in loan covenants for triggering a default if deteriorating financial results occur.

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Duties Of A Financial Controller

See Also:
Controller

Duties of a Financial Controller

The duties of a financial controller revolve around ensuring that a business is operating effectively and efficiently. Financial controller duties are to manage accounting and monitor internal controls. Furthermore, the financial controller responsibilities include banking and finance activities, proper reporting and payment to all taxing authorities, insurance recommendations and related purchases and corporate documentation. Furthermore, controllers provide an array of information needed by business executives. A controller will also work directly with the management team to dynamically run the business. A financial controller reports to the executive management team. In conclusion, the ultimate responsibilities of financial controller are to deal with finance, accounting, production, marketing, personnel and operations to ensure that the business is profitable and there are proper internal controls.

In other words, you could say that a controller is a not much more than a financial reporter. While a controller cannot make any drastic decisions as a CFO would probably do, the financial controller is the individual that is providing and interpreting the financial information that the company’s output is yielding. A controller’s duties are important because the remainder of employees in the company, from workers to executives, rely on his interpretation of figures to make decisions on expenses and sales. It is because of this reason that the financial controller receives a decent salary of, on average, up to $126,373.

Controller Duties

To make the job of a controller more lucid, a list of the financial controller responsibilities includes the following:

  • Maintain all the necessary reporting to the banks and backup system reports
  • Maintain the company bank balance and remain cognizant of outstanding checks
  • Approve invoices that need to be paid
  • Read and review any documentation attached to checks for approval and accuracy sake
  • Follow up with customers that are over 45 days old
  • Make sure all financial statements and tables are correct and precise
  • Make sure that the owner of the company receives the company bank statement unopened
  • Reconcile all bank statements and monthly financial reports
  • Prepare monthly sales and use tax returns
  • Prepare projections annually and update monthly with actual figures
  • The controller must coordinate with the auditors and be prepared to surrender documentation if called upon
  • Coordinate with the tax division of the company and prepare any schedules required for tax returns
  • Maintain the renewals on company insurance

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duties of a financial controller

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duties of a financial controller

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Due Diligence on Lenders

See Also:
Relationship with Your Lender
Finding the Right Lender
The Dilemma of Financing a Start-up Company
Every Business has a Funding Source, Few have a Lender
Angel Investor

Due Diligence on Lenders

I am sure all of you have applied for some type of a loan from some institution to be used for college, car, home or business. By the end of the process, you have given them applications and supporting documents that, in some cases, can weigh several pounds. When I am involved in a transaction with a client, I encourage them to do as much due diligence on my company, Summit Financial Resources, as we will do on them.

For example, I was recently told by a business woman named Robin that all lenders are the same. A little concerned with her comment, I asked “Why do you feel that way?” She went on to tell me that banks are controlled by the government; therefore, all banks have the same rules, so all banks are the same. She continued by saying, “I just use the bank located nearest to my business.” I replied, “I agree that government does control banks. But, the government rules are guidelines, and the lenders create their lending policies and procedures from these rules. Therefore, each lenders’ policies and procedures are different, so you really should consider doing due diligence.” The reason for the due diligence is to determine which lender understands your needs, and to make sure the lender’s policies and procedures will meet those needs. Also, I believe you should make certain the lender understands and values your business.

While looking at me as if she was not sure I was believable, she asked “What should I ask a lender? They have the money and I don’t want to make them mad by asking questions about them.” I replied by saying “Well, if that is the case, do you really want to get in a lending relationship with them?” Now appearing convinced, she wanted to know what she should be looking for in a lender and stated “All I know for sure is I need their money to have the cash to grow my business.”

I told her, first of all, you need to decide what size of lender is appropriate and again, to make sure they meet your needs. In my opinion, location does not come into the mix. I categorize lenders into four groups, big market, middle market, small market and those in it for the money (I will share details of this conversation in next week).

Next, do you like the lender? Does he or she want to understand your needs and value your business? The lender is going to check out your credit and personal references, so ask the lender for some current or past customers. The lender’s customers can provide you with information on the lender’s strengths and weaknesses.

Another thing you want to talk about with the lender is their support staff. Make sure you are comfortable with the prefunding and post funding support staff. By doing this you will know if the support will be via voice mail system, Internet, or a real person.

Robin did find the lender she liked with Summit. I visited with her later and she thanked me and shared the many successes her business has experienced. Then she told me she had shared her new found knowledge of due diligence with her business associates.

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Debt Ratio Analysis

Debt Ratio Analysis Definition

Debt ratio analysis, defined as an expression of the relationship between a company’s total debt and assets, is a measure of the ability to service the debt of a company. It indicates what proportion of a company’s financing asset is from debt, making it a good way to check a company’s long-term solvency. In general, a lower ratio is better. Value of 1 or less in debt ratios shows good financial health of a company.

Debt Ratio Meaning

Debt ratio, meaning a measure of the financial stability of a company, is a common evaluation for any investment which requires a loan. The lower the company’s reliance on debt for asset formation, the less risky the company is. On the other hand, the higher ratio means a company has high insolvent risk since excessive debt can lead to a heavy debt repayment burden.

Debt Ratio Formula

The debt ratio formula is used more simply than one would expect:

Debt ratio = total debt / total assets

Debt Ratio Calculation

A simple debt ratio calculation will put the simplicity of this equation into perspective.

Example: a company has $10,000 in total assets, and $8,000 in total debts. Debt ratio = 8,000 / 10,000 = 0.8

This means that a company has $0.8 in debt for every dollar of assets and is in a good financial health.

Debt Ratio Example

Riley is the average accountant. Showing up to the office from 9 – 5 every day Riley has earned her living through hours of study, analysis, and application. To Riley, the principals of accounting are useful for both professional and personal uses.

Riley is very good at equations such as debt ratio, mortgages and multinational corporations the same. Today, she wants to apply what she knows to her home financing. The debt ratio analysis she performs is listed below:

Riley has $10,000 in home equity and $100,000 in total debts.

Debt ratio = $100,000 / $10,000 = 10

This means that Riley has $10 in debt for every dollar of home equity.

Riley knows a web based debt ratio calculator will not serve the purpose that a skilled and certified analyst can. Riley is one of these people. She values her skills as she moves forward in her life.

Resources

For statistical information about industry financial ratios, please click the following website: www.bizstats.com and www.valueline.com.

See Also:
Financial Ratios
Debt to Equity Ratio
Current Ratio
Time Interest Earned Ratio Analysis
Debt Service Coverage Ration (DSCR)

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Due Diligence

See Also:
Due Diligence on Lenders
Auditor
Mergers and Acquisitions (M&A)
Audit Committee
Loan Agreement

Due Diligence Definition

Due Diligence is an extensive qualitative and quantitative look at a company in order to make the best informed business decision about a company. Due Diligence is often associated with audits, where it is required before a public offering, as well as mergers and acquisitions in order to reduce the risk in the market for these activities.

Due Diligence Meaning

Due Diligence often becomes necessary when a large transaction is about to take place like a merger or loan agreement, or when the company’s financials are going to be presented to the public. Often times due diligence requires that an assessment be made qualitatively as well as quantitatively. A qualitative act of due diligence may be to assess the mental state and capability of the management. This can be done through plant tours to see how the company is run, down to interviews with several employees, suppliers, buyers and others who deal with the company on a day to day basis. Quantitative due diligence includes thorough investigations of the books and records. This can range from asset appraisals to day to day transactions. A thorough understanding of internal controls and its effectiveness also become necessary to ensure the risk for the business is as low as possible.

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Down Payment Definition

Down Payment Definition

A down payment can be defined as an initial payment towards the financing of an expensive purchase. For individuals, this purchase is similar to a car or home. For businesses, however, this purchase could be a number of things: land, a warehouse, machinery, servers, or almost anything. Down payments are a deposit which assures to the financier that you will pay your debt. The down payment is usually larger than subsequent principal payments.

Down Payment Explanation

A down payment can be explained as a partial payment towards a purchase. They are made towards either trade credit or the financier of a purchase. It is decided on by the financier and accepted by the purchaser. A down payment is a percentage of the value of the loan.

Down payments are, in some senses, a goodwill measure. They ensure the financial stability and willingness to participate on the part of the purchaser. Though it may not seem like this, the down payment serves this purpose and is thus a staple concept when products are financed. The rationale is simple: if the purchaser is willing to pay the down payment the party is at least responsible enough to do so. The down payment mitigates some of the risk the financier takes when making an agreement with the customer.

Be weary of the no down payment business loans available on the internet. It is up to you to make sure you read all contracts fully. Financing a business is a difficult process, if someone is offering a deal that is too good to be true, chances are that it is not true at all.

Down Payment Example

Joey is going to purchase another 18 wheeler for his distribution business. He needs this tool to continue operations. Though Joey can not pay for the truck fully he can afford to finance it.

Joey has aligned a financier to help him cover the cost of the truck. The financier requires regular principal and interest payments to assure that the truck will be paid off. Additionally, the financier requires a down payment. The down payment, a somewhat substantial sum, establishes that Joey is willing to work with the party he is borrowing from.

Six months later, Joey completely pays off the truck. He does this simply and moves on to making more profits. By satisfying the needs of the lender Joey can move on to bigger and better things. Soon he will make a down payment on land in order to build a new distribution warehouse.

See Also:
Payment Terms
Notes Payable
Payroll Accounting
PEO Arrangement Compared to Outsourcing Payroll
Payback Period Method

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