Assesing Financial Health

In: Business and Management

Submitted By shourib
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The vote, taken by five School of Business Promotion Committee members and the candidate’s representative revealed 3 votes in favor and 3 votes

Evaluating Financial Health
Dr. C. Bulent Aybar

Professor of International Finance

Recall the Three Pillars of Value Creation
• Managers create value by focusing on product market and financial market strategies.

• Product market strategies involve management of revenues and expenses, efficient allocation and use of firm assets as well as sound (positive NPV) investment decisions.

• Financial market strategies involve prudent management of liabilities and optimal mix of debt and equity in funding firm operations and investments.

• Finally financial market strategies require optimal distribution decisions that would balance firm’s reinvestment needs and shareholder wealth.
© Dr. C. Bulent Aybar

Creating Value Through Growth and Profitability
Growth and
Profitability

Product
Market
Strategies

Financial
Market
Strategies

Operations

Investments

Financing
Decisions

Distribution
Decisions

Managing
Revenues and
Expenses

Managing
Working
Capital and
Fixed Assets

Managing
Liabilities and
Equity

Dividends and
Repos

Return on Equity
• The starting point for a systematic analysis of a firm's performance is its return on equity (ROE), defined as:
• ROE=Net income/ Equity

• ROE is a comprehensive indicator of a firm's performance because it provides an indication of how well managers are employing the funds invested by the firm's shareholders to generate returns.

• On average over long periods, large publicly traded firms in the U.S. generate ROEs in the range of 11% to 13%.

© Dr. C. Bulent Aybar

Levers of Financial Performance
• 3 determinants of ROE are

– Profit margin  Net income / Sales (Reveals how well firm manages its…...

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