MGMT 1 Lecture Notes - Lecture 34: Merage Family, Inventory Turnover, Preferred Stock
Paul Merage School of Business
MGMT 1
Intro to Business Management
4 units
No Pre-reqs
Course code: 38001
tuesday/thursdays 9:30-10:50
Location:SB1 1200
Final: Thursday of finals week
Course Notes
❖ Profitability (Performance) Ratios
➢ Measures how effectively a firm’s managers are using its various resources to
achieve profits.
➢ Earnings per share = (net income after taxes/number of common stock shares)
■ A revealing ratio because earnings help stimulate the firm’s growth and
provide for stockholders’ dividends.
■ FASB requires companies to report their quarterly EPS in two ways:
● Basic – helps determine the amount of profit a company earned for
each share of outstanding common stock.
● Diluted – measures the amount of profit earned for each share of
outstanding common stock, but considers stock options, warrants,
preferred stock, and convertible debt securities.
■ Return on Sales = (Net income/net sales)
● Shows us whether the firm is doing as well as its competitors in
generating income from sales.
● Higher the risk of failure or loss in an industry – higher the return
investors expect on their investments.
◆ They expect to be well compensated for shouldering such
odds.
■ Return on Equity = (net income after tax/total owners’ equity)
● Indirectly measures risk by telling us how much a firm earned for
each dollar invested by its owners.
❖ Activity Ratios
➢ Activity ratios tell us how effectively management is turning over inventory.
➢ Inventory turnover = (cost of goods sold/average inventory)
■ Measured the speed with which inventory moves through the firm and gets
converted into sales.
■ The more efficiently a firm sells or turns over its inventory, the higher the
revenue of the firm.
■ A lower-than-average inventory turnover ratio indicates obsolete
merchandise on hand or poor buying practices.
➢ Managers need to be aware of proper inventory control and anticipated inventory
turnover to ensure proper performance.
