Tag Archives | financial ratio

Dividend Payout Ratio

See Also:
Dividends
Dividend Yield
Financial Ratios

Dividend Payout Ratio Definition

What is dividend payout ratio? The dividend payout ratio measures the percentage of a company’s earnings paid to shareholders as dividends. When a company earns profit, it has the option of reinvesting that profit into the business to grow and expand the company or paying some of that profit out to shareholders as dividends.

We can define also payout ratio as the percent of earnings that a company pays out in dividends to shareholders. The opposite of the dividend payout ratio is the retention ratio. Retention ratio is the percentage of profit that is reinvested in the company instead of being paid out to shareholders in dividends.

Payout Ratio Interpretation

You can analyze a company’s payout ratio to determine various characteristics of the company and its operations.

For example, small fast-growing companies are likely to invest much of their earnings in the business for expansion and growth. These companies are likely to have a low payout ratio or none at all. A low payout ratio can also demonstrate that a company’s dividend is small compared to its earnings, indicating that the dividend is likely to be secure and reliable.

Whereas, large slow-growth companies, or companies like utility companies, are likely to pay out larger dividends to shareholders. These companies will have a higher payout ratio.

Dividend Payout Ratio Calculation

Use the following formula to calculate dividend payout ratio:

Payout Ratio = Dividends per Share
       Earnings per Share

Retention Rate Calculation

Use the following formula to calculate retention rate.

Retention Ratio = Net Income – Dividends
     Net Income

You can also use the following formula.

Retention Ratio = 1 – Payout Ratio

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Current Liabilities

See Also:
Balance Sheet
Current Assets
Fixed Assets
Fixed Assets – NonCurrent Assets

Current Liabilities

Current liabilities is a category of liabilities on the balance sheet. The category also consists of debts and other financial obligations expected to be paid or settled within one year or within one normal operating cycle of the business (whichever is longer). The balance sheet also includes a category for long-term liabilities. In this article, we will look at examples of items that would be found in this category and the key ratios to calculate current liabilities.

Examples of Items

Examples of items considered this type of liability include the following:

Key Ratios to Calculate Current Liabilities

You need to have the following key ratios to calculate current liabilities:

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current liabilities, Key Ratios to Calculate Current Liabilities

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Capitalization Rate

See Also:
Capitalization Rate Example
Capitalization
Annual Percent Rate (APR)
Wage Rate
Currency Exchange Rates

Capitalization Rate Definition

The Capitalization Rate definition is a formula which represents the difference between annual net operating income and cost of capital. Its use in the business world serves the main purpose of valuation, including the following:

For example, the rate for hotels provides market knowledge about how well competitors pay for the capital they take.

Capitalization Rate Meaning

Capitalization Rate (CR) means a method to understand how company operations help overcome the cost of capital. Knowing this leads to a piece of information for a company; that it can pay for the price of resources. Furthermore, this shows the value of any project a company chooses to begin. It is a general valuation tool. It is also supported by the use of other financial ratios depending on industry and specific needs. In conclusion, CR is a business valuation tool.

Capitalization Rate Formula

Use the following simple capitalization rate formula to calculate CR. Remember, it can lead to great benefits.

CR = annual net operating income / cost

Calculation

Capitalization rate is processed, with the proper information, quite easily. See the following example for the capitalization rate calculation:

If:
Net income = $1,000,000
Cost = $250,000

Then:
CR = $100,000 / $250,000 = 4

Capitalization Rate and Business Valuation

Are you looking at utilizing capitalization rate as a valuation tool? When valuing a business, it is standard practice to consult with a valuation firm. Need help finding one? We will get you connected with one of our strategic partners for your valuation needs. Fill out the form below to get connected:

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Capitalization Rate Definition, Capitalization Rate Formula, Capitalization Rate

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Capitalization Rate Definition, Capitalization Rate Formula, Capitalization Rate

 

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Accounts Payable Turnover Analysis

See Also:
Accounts Receivable Turnover
Days Payable Outstanding
Financial Ratios
Operating Cycle Analysis

Accounts Payable Turnover Definition

The accounts payable turnover ratio indicates how many times a company pays off its suppliers during an accounting period. It also measures how a company manages paying its own bills. A higher ratio is generally more favorable as payables are being paid more quickly. When placed on a trend graph accounts payable turnover analysis becomes simplified: the line raises and lowers just as the ratio does. Common adaptations used to calculate accounts payable turnover yield results like accounts payable turnover ratio in days, A/P turnover in days, and more. A useful tool in managing and measuring the efficiency of paying bills is a Flash Report.

Accounts Payable Turnover Formula

A solid grasp of the accounts payable turnover ratio formula is of utmost importance to any business person. Though some ratios may or may not apply to different business models everyone has bills to pay. The need to understand A/P turnover is universal.

Accounts payable turnover = Cost of goods sold / Average accounts payable

Or = Credit purchases / average accounts payable.

Purchases = Cost of goods sold + ending inventory – beginning inventory.

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Accounts Payable Turnover Calculation

Calculate accounts payable turnover by dividing total purchases made from suppliers by the average accounts payable amount during the same period.

Average Accounts payable is the average of the opening and closing balances for Accounts Payable.

In real life, sometimes it is hard to get the number of how much of the purchases were made on credit. Investors can assume that all purchases are credit purchase as a shortcut. As a result, it is important to remain consistent if the ratio is compared to that of other companies.

For example, assume annual purchases are $100,000; accounts payable at the beginning is $25,000; and accounts payable at the end of the year is $15,000.

The accounts payable turnover is: 100,000 / ((25,000 + 15,000)/2) = 5 times

An accounts payable turnover days formula is a simple next step.

365 days per year / 5 times per year = 73 days

Slightly different methods are applied to calculate A/P days, A/P turnover ratio in days, and other important metrics. This article outlines the fundamentals of how to calculate A/P turnover. For more ways to improve your cash flow, download the free 25 Ways to Improve Cash Flow whitepaper.

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Resources

For statistical information about industry financial ratios, please go to the following websites: www.bizstats.com and www.valueline.com.

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Financial Ratios

Monitoring a company’s performance using ratio analysis and comparing those measures to industry benchmarks often leads to improvements in company performance. Not to mention these ratios are often part of loan covenants. The following article provides an overview of the 5 categories of financial ratios and links to their description and calculation.

Use the following Financial Ratios to measure financial performance against standards. In addition, analysts compare these ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). Furthermore, the most useful comparison when performing financial ratio analysis is trend analysis. They are derived from the three following financial statements:

5 Categories of Financial Ratios

The five (5) major categories in the financial ratios list include the following :

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5 Categories of Financial Ratios

5 Categories of Financial Ratios

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Operating Leases Going Away?

The FASB (Financial Accounting Standards Board) and the IASB (International Accounting Standards Board) are recommending that the use of operating leases be scrapped. In addition, they are recommending that you treat all leases as capital leases. For over 40 years, FAS 13 has been the standard. But this step will change all that.

Operating Leases Going Away?

Under the proposed rules operating leases will be capitalized with both an asset and a liability account. Rent expense would go away and depreciation and interest expense would take it’s place.

Why is this important to a CFO? It’s the financial ratios! EBITDA no longer becomes useful in valuing a company. Your debt to equity ratio becomes inflated and the debt service coverage ratio becomes compressed. You will have to modify all your bank covenants to reflect the new presentation.

The question is: does this increased complexity add value to the process of evaluating the financial performance of a company? We will have to wait and see. Until July 2010 the accounting regulators are soliciting comments to their proposed changes. Implementation would not begin until 2011.

If you want more tips on how to improve cash flow, then click here to access our 25 Ways to Improve Cash Flow whitepaper.

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