what to do with profits

financial ratios

responsibilities of financial manager

• financial planning

• investment(spending money)

• financing (raising money)

goal of financial manager

• maximise value of firm

• consider ST and LT consequences of buisinesses’ actions

• maximising profits

profitability ratios

• return on assets

• return on shareholders equity

return on assets

return on shareholders equity

gross profit margin

net profit margin

earnings per share

retained earning

profits not paid out

ways to apply retained earnings in business

• invest in surplus finds

• expand exisiting capacity and capabilities

• create new product lines

• expand externally through mergers & aquasitions

• purchase patents

dividends as a soruce of return of shareholders

regular payments from after-tax profits earned over a lifetime of share ownership

capital growth as source of return of shareholders

increase in share price , only realise (earn) this return when sell the share

investor perspective 1

• stable & growing dividends assigned to s/h of good fundamentals

• dividends significant portion of total shareholders return

• dividend history NB

• future dividends and capital growth not guaranteed

investor perspective 2

• mature & slower growing companies pay higher dividends (lower risk for buyers of shares)

• younger & faster growing divs pay lower divs & reinvested in high-growth opportunities

• dividends NB indicator when company is valued

companies perspective: dividends policy

• rewards s/h now vs investing in growth opportunities that will reward s/h in future

• factors influencing dividend policy

  • financial performance: profitability, cash flows, div coverage ratio

  • balance sheet strength: retained earnings, debt levels

  • legal contraints

  • investor expectations

• most companies strive NOT to reduce divs even if experiencing difficulty

• div policy not one size fits all