Financial Planners Have 6 P’s: Proper, Prior, Planning, Prevents, Poor, Performance

Financial Planners have 6 P’s:

Proper Prior Planning Prevents Poor Performance

Current assets and liabilities are all short term (less than 12 months). Current assets also include inventories, quick assets do not.

The current ratio is a measure of short term liquidity. Various types of transactions affect it. For e.g., suppose the firm borrows over the long term to raise money. The short run effect would be an increase in cash from the issue proceeds and an increase in long term debt. Current liabilities would not be affected, so the current ratio would rise. Note that an apparently low current ratio may not be a bad sign for a company with a large reserve of untapped borrowing power.

Relatively large inventories are often a sign of short term trouble. The firm may have overestimated sales and overbought or overproduced thus. In this case, the firm may have a substantial portion of its liquidity tied up in slow moving inventory. The quick or acid-test ratio is computed just like the current ratio, except inventory is omitted. Note that using cash to buy inventory does not affect the current ratio, but it reduces the quick ratio.

Financial leverage ratios or just leverage ratios are intended to address the firm’s long-term ability to meet its obligations, or, more generally its financial leverage.         

Interest coverage ratio or Times Interest Earned (TIE) ratio measures how well a company has its interest obligations covered and Is calculated as EBIT/Interest

The Inventory turnover is a measure of the number of times inventory is sold or used in a time such as a year. The equation for inventory turnover equals the cost of goods sold or net sales divided by the average inventory. The higher this ratio, the more efficiently we are managing inventory.

Debtor turnover ratio measures how fast we collect money from our debtors. Receivables turnover ratio can be calculated by dividing the net value of credit sales during a given period by the average accounts receivable during the same period.

Asset turnover ratio is the ratio of the value of a company's sales or revenues generated relative to the value of its assets. This ratio can often be used as an indicator of the efficiency with which a company is deploying its assets in generating revenue. It is calculated as Sales/Total assets.

The Profitability Ratios help us measure how efficiently a firm uses its assets and manages operations.

1. Profit Margin Ratio: Measures the percentage profit generated on the total sales (Net profit/Sales).
2. Return on Assets: Measures profit per dollar of assets (Net Profit/Total Assets).
3. Return on Equity: Measures net income         generated with the money shareholders have invested (Net profit/Total Equity).

Price Earnings Ratio measures how much investors are willing to pay per dollar of current earnings. Higher P/E ratio is often taken to mean the firm has significant prospects for future growth.