Financial Management Essentials You Always Wanted To Know

FCF = EBIT x (1 – T) + Depreciation – Capital expenditure – Change in net operating working capital

When making capital budgeting decisions companies use free cash flow to check whether the investment is worth making. Free cash flow is the cash that remains for distribution to all investors, stockholders and debtors, after the company has made all investments in fixed assets, and in additional working capital needed to run its operations.

Investment decisions involving fixed assets are called Capital Budgeting.

company borrows money from stockholders and invests that in Assets that help the company generate sales which finally generate profit. This gives us the below three entities:
Borrowing from Stockholders to invest in Assets
Assets-to-Equity ratio = Total Assets/Stockholders’ Equity
Assets help generate Sales
Asset Turnover ratio = Sales/Total Assets
Sales generate Profit
Return on Sales = Net Income/Sales
If we combine all the three entities above, we get ROE as below:
ROE = (Net Income/Sales) x (Sales/Total Assets) x (Total Assets/Stockholders’ Equity)
The above expanded ROE equation helps us understand where the company needs to improve if its ROE is low.

ompany borrows money from stockholders and invests that in Assets that help the company generate sales which finally generate profit. This gives us the below three entities:
Borrowing from Stockholders to invest in Assets
Assets-to-Equity ratio = Total Assets/Stockholders’ Equity
Assets help generate Sales
Asset Turnover ratio = Sales/Total Assets
Sales generate Profit
Return on Sales = Net Income/Sales
If we combine all the three entities above, we get ROE as below:
ROE = (Net Income/Sales) x (Sales/Total Assets) x (Total Assets/Stockholders’ Equity)
The above expanded ROE equation helps us understand where the company needs to improve if its ROE is low.

Return on Equity is given as:
ROE = Net Income/Stockholders’ Equity

Cash Times Interest Earned ratio = Cash earned before Interest and Tax/Interest expense where, Cash earned before Interest and Tax = Cash from Operating Activities + Interest expense + Income tax expense

Cash Times Interest Earned ratio = Cash earned before Interest and Tax/Interest expense

would be greater than 1 for a “cash cow” that is able to pay for its capital expansion using cash generated from operations alone. It does not need any further financing in form of debt or equity

Cash Flow Adequacy ratio = Cash from Operating Activities/Cash used in Investing Activities