Evaluating Financial Performance

In: Business and Management

Submitted By Bcoh
Words 668
Pages 3
Financing New Ventures

In Chapter 5, we learned about evaluating financial performance. We can evaluate performance by looking at financial ratios and conducting different forms of analyses. Some useful analyses are trend analysis, cross-sectional analysis, and industry comparables analysis. Trend analysis is used to examine a venture’s performance over time. Cross-sectional analysis is used to compare a venture’s performance compared to another company at the same point in time. Industry comparables analysis is used to compare a venture’s performance against the average company’s performance in the same industry. Next, we looked at MPC income statements and balance sheets. A major part of MPC is cash burn. Cash burn is the cash a venture expends on its operating and financing expenses, as well as its investments in assets. Another important part of MPC is cash build, which is equal to the (net sales – change in receivables). In order to find the net cash burn, you must subtract the cash build from the cash burn. Liquidity ratios, which indicate the ability to pay short-term liabilities when they come due, is also an important aspect. Another evaluation tool is the conversion period ratio. This ratio indicates the average time it takes in days to convert current assets and current liability accounts into cash. The operating cycle and the cash conversion cycle also play a part in the evaluation. There are also different types of conversion periods. They include inventory-to-sale, sale-to-cash, and purchase-to-payment. These three conversion periods are inputs for the cash conversion cycle. To find the conversion period, you must calculate (I-to-S period) + (S-to-C period) – (P-to-P period). Leverage ratios are another financial ratio used to evaluate performance. The leverage ratio indicates the extent to which the venture is in debt and…...

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