Financial

Leverage Ratios Explained - Examples and Calculations

LEVERAGE RATIOS:

The third classification of ratios are known as Leverage Ratios. Both long-term and short-term creditors are concerned with the amount of leverage a company employs, since it indicates the firm's risk exposure in meeting its debt obligations. The most common leverage ratios include; debt ratio, and debt to equity ratio. Lets look at each ratio separately, beginning with the debt ratio.

DEBT RATIO:

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Inflows on the Cash Flow Statement

2.   CASH INFLOWS

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Calculating the Break-Even Point - Formulas and Examples

Three (3) Components of the Break-even Point Formula

The three components needed to determine a company's break-even point in units are FIXED COSTS, VARIABLE COST PER UNIT, and SELLING PRICE PER UNIT. Below discusses each component.

COMPONENT 1   -  FIXED COSTS

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Step 4 for Calulating a Weighted Average - Sales Percentage for each Product

STEP 4 -  FORECAST THE SALES PERCENTAGES FOR EACH PRODUCT IN YOUR PRODUCT LINE:

The next step required in creating your weighed average selling price and weighted average product cost is to assign sales percentages for each product within your product line. These percentages are equally important since they estimate the percentage at which customers will purchase each product, model, or brand-name. To further explain this process, lets continue with our retail clothing store example.

 

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Step 6 for Calulating a Weighted Average - Selling Prices for each Product

STEP 6 - Determine Your Selling Prices for each Product

Now its time to set your prices for each product you plan to sell. The pricing methods available to assist you in setting your prices include; Markup Pricing, Breakeven Pricing, Perceived Value Pricing, Hourly Rate Pricing, and Competitor Pricing (Please refer to the section entitled " Setting Your Prices" for more information on these pricing methods).

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Outflows on the Cash Flow Statement

3.    CASH OUTFLOWS

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The Heading of a Sensitivity Analysis

1. - THE HEADING

The first component of a Sensitivity Analysis is the HEADING.  Notice the "Heading" of the Sensitivity Analysis depicts the name of the company (Resume Services), the type of statement to follow (Forecasted Sensitivity Analysis), and the date of the analysis (for the year ending December 31, 200X).

RESUME SERVICES
SENSITIVITY ANALYSIS
FOR YEAR ENDING DECEMBER 31, 200X

 

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Profitability Ratios Explained - Examples and Calculations

PROFITABILITY RATIOS:

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How to Calculate Ending Cash Balance - Forecast

6.    ENDING CASH BALANCE

The ending cash balance is calculated by subtracting cash outflows, interest paid for financing and principal paid on financing FROM cash inflows and financing such as bank loans, operating loans, etc. Below illustrates the forecasted ending cash balance each month for Red Deere Electronics.

 

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Sensitivity Analysis - Sales, Costs, Fixed Costs and Net Income

3. - THE BODY OF THE SENSITIVITY ANALYSIS

The final component of the sensitivity analysis is The Body. The Body consists of four main areas - A) Sales, B) Variable Costs, C) Fixed Costs and D) Net Income. Lets look at each component separately.

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