Financial Instruments and Metrics for Business Decisions
Financial Instruments and Metrics
Key Financial Ratios and Metrics
Net Profit (NetP)
NetP = Total Assets – Payable Liabilities
Return on Financial Assets (R.finan)
R.finan expresses the capacity for reward of owned funds. It represents the performance obtained before distribution to partners/shareholders, calculated as: Net Income / Equity (Owned Funds).
Leverage
Leverage is the relationship between assets and equity, indicating the investment (assets) made by the company for every dollar of equity.
Leverage = Assets / Equity
Credit Lines and Financing Options
Line of Credit (PO Lissa Credit)
A Line of Credit is a contract where a bank grants credit to customers for a specific term and amount, charging a commission to make funds available within defined limits.
Associated expenses may include:
- Policy fees
- Opening commission
- Brokerage fees
- Commission on unused balance
A Line of Credit allows businesses to meet future needs without knowing the exact amount required.
Leasing
Leasing is a financing instrument that allows companies to use assets without owning them. Businesses pay quotas for a specified period and can choose to purchase the asset at the end of the term or return it.
Leasing is a form of external financing, essentially a long-term rental agreement. The lessee pays fixed monthly installments, and the lessor provides various services.
Retained Earnings (Reservations)
Retained Earnings are an internal financing instrument derived from reinvesting profits within the company, rather than distributing them to shareholders or partners.
Investment Analysis Tools
Net Present Value (NPV)
The NPV of an investment is the difference between the present value of net cash inflows and the initial disbursement. All cash flows, expenses, and income are discounted.
Monetary inputs and outputs caused by the investment are added or subtracted accordingly.
NPV = – C + F1 / (1 + i1) +…+ Fn / (1 + i1)(1 + i2) … (1 + in)
Internal Rate of Return (IRR)
The IRR is the discount rate that makes the NPV equal to zero. It represents the profitability of the project.
Working Capital and Liabilities
Working Capital
Working Capital = Current Assets – Current Liabilities
It represents the resources available for day-to-day operations.
Bonds (Issue)
A bond issue is a form of long-term borrowing. Bondholders become creditors of the company. This allows companies to access savings that would otherwise be difficult to obtain. A bond can be considered a loan split into smaller loans, represented by individual bonds.
Factoring
Factoring involves a service package provided by a factor to a company related to its trade receivables. The company gives the factor its receivables and receives an advance payment, less a discount and fees. The factor assumes the risk of non-payment, analyzes customer credit, and manages collections. This provides immediate financing by converting receivables into cash (minus expenses).