Fundamentals of Financial Management Paper Example

Paper Type:  Essay
Pages:  4
Wordcount:  995 Words
Date:  2022-07-15

Cumulative Profit

Cumulative profit measures the total profit the company has earned. It shows the difference between the total revenues earned and the total costs incurred (Brigham & Houston, 2015). It determines the performance of the company since it indicates whether the operations of the firm are profitable or not. If the cumulative profit is negative (loss), it implies that the company has not performed well. A high cumulative profit is desirable. The simulation results indicate that the company's cumulative profit is $4,188,507.

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Ending Market Share

Market share is the company's sales as a percentage of the total sales in the industry (Jenkins, 2012). It measures the company's performance relative to the industry or competitors. The market share can give insights into the quality of the competitor's product relative to competitors, the effectiveness of the company's pricing and other marketing activities. The ending market share can be compared with the beginning market share (Jenkins, 2012). If the ending market share is greater than the beginning market share, it suggests the company's product is doing well. A decline in market share would be a red flag. Based on the simulation results, the market share for in the traditional segment Able was 13%.

Average Return on Sales (ROS)

Return on sales refers to the net income earned per dollar of sales (Brigham & Houston, 2015). It measures the firm's operational efficiency by showing the net profit a company makes per dollar of sales. A high and positive return on sales indicates that the company's revenues are higher than the operating costs. When the return on sales is low, the company has to increase the volume of sales to generate a high total profit. A low ROS may also imply that the company is not doing well in controlling operating costs. The output of simulation shows that the ROS for the company (Andrews) is 4.1%.

Average Asset Turnover

Asset turnover is the total revenue generated per dollar of average total assets utilized in a period (Gibson, 2013). It indicates how efficient the company is in using its assets to make sales. A decline in asset turnover suggests a fall in the efficiency of the company and may be as a result of internal problems (Weygandt, Kimmel & Kieso, 2015). Asset turnover varies from one sector to another hence a low turnover is not necessarily an unfavorable measure. Andrews' average asset turnover is 1.05 as indicated by the simulation results.

Average Return on Assets (ROA)

Return on assets refers to the net income generated per dollar of average total assets utilized in a period (Brigham & Houston, 2015). It measures profitability since it indicates the firm's efficiency in using its assets to make profits. A high return on assets suggests that the company is deploying its total assets efficiently to generate profits (Weygandt, Kimmel & Kieso, 2015). Andrews' ROA is 4.4% implying that it made a net profit of 4.4 cents per dollar of average total assets.

Average Return on Equity (ROE)

ROE is the net income per dollar of shareholders' equity. It shows the company's efficiency in utilizing shareholders' funds to generate profits (Gibson, 2013). A high ROE implies that the firm is profitable although high leverage can increase the ROE. Shareholders are more interested in a company's ROE than any other profitability measure. Andrews' ROE is 8.7% showing that it generated a positive return on shareholders' investment.

Ending Stock Price

Stock price shows the market value of the company's share. It measures performance since it reflects the investor's perception or expectation of the company's earnings (Brigham & Houston, 2015). Company's performance affects its stock price. For instance, the stock market price usually falls when a company makes losses or reports earnings that are below the analysts' expectations. Companies that are performing well usually have high stock prices. The ending stock price for Andrew was $34.5.

Ending Market Capitalization

It shows the total market value of the company's outstanding shares (Brigham & Houston, 2015). The market capitalization for a highly profitable company is higher than that of a company making losses. Andrews has 2 million shares with a total market capitalization of $69 million.

Ranking of Performance Measures

I would rank the measures from the most important as cumulative profit, average ROS, market share, average ROA, average asset turnover, average ROE, ending stock price and market capitalization. Profitability is the most critical aspect of performance. Cumulative profit measures the actual profitability of the company hence it is an essential metric. Market share is significant since it indicates the potential profit potential of the company. However, it ranks below ROS since it does not help to have a high market share when the ROS is negative. Asset turnover, ROA, and ROE are relative profitability measures. They rank below absolute measures such as cumulative profit since they can be misleading. A company can have a high ROE with a very low cumulative profit. ROE is a product of ROA and leverage. The above measures influence stock price and market capitalization hence they rank lowest.

Measures to Base Company Performance

I would use cumulative profit, market share and average ROE to assess the company's performance. Cumulative profit and ROE measure profitability which is of great interest to shareholders, management, and other stakeholders. ROE is critical since it influences investors' decision on whether to invest in the company or not. Market share assesses the effectiveness of marketing and other strategies. It is also crucial as it evaluates the future profitability and growth of the company. A high and increasing market share is associated with great profit potential.

Strategy for the Company

I select the cost strategy, which involves finding measures to reduce production cost. It will enable the company to charge competitive prices and increase its market share. Besides, the strategy will increase the ROS thus improving profitability.

References

Brigham, E., & Houston, J. (2015). Fundamentals of financial management (14th ed.). Cengage Learning.

Gibson, C. (2013). Financial statement analysis. Mason, Ohio: South-Western.

Jenkins, D. (2012). Measuring performance. Farnham, Surrey: Gower.

Weygandt, J., Kimmel, P., & Kieso, D. (2015). Financial accounting. Hoboken, NJ: John Wiley & Sons, Inc.

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Fundamentals of Financial Management Paper Example. (2022, Jul 15). Retrieved from https://proessays.net/essays/fundamentals-of-financial-management-paper-example

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