Business Principles

Basic business principles used by almost all business operations from start-up to operational standards.

Price to Sales Ratio: A Poor Indicator of Value

The price to sales ratio is a marginal valuation ratio at best.  It is really an offshoot of an antiquated concept of valuing a business. In the past, one of the more common methods to value a business deal was to use a multiplier of sales. The price to sales ratio used with business ratios is similar. Simply stated, the price to sales ratio is the entire market value of the company (the price) as a function of revenue (sales).

Leverage Ratios

Financial Leverage

Leverage refers to the ability to lift a heavier load using a fulcrum and a lever.  The common image is a board on a triangular pivot point with a heavy weight (M1) on one end and a lighter weight (M2) on the other.   As the lever shifts towards the lighter load it starts to lift the heavier weight. In effect, as the distance ‘b’ gets longer, it becomes easier to lift M1. This principle works with finances too.  How so?

Value Investing

Value Investing

Value investing is a concept of buying and selling stocks based on business fundamentals and not as a reaction to news or market trends.   It is a well accepted principle that often the market overreacts to news causing stocks to plummet in price or escalate in value.   Value investors ignore this and use sound business fundamentals to trade stock.   Much of historical wealth accumulation is based in value investments.   There are no short-cuts or sudden actions taken by value investors.  All decisions are derived by business analytics and trendlines.

Price to Cash Flow

Price to Cash Flow Ratio

The price to cash flow ratio is a valuation tool used to assist buyers and sellers of stock in determining timing of purchases or the disposition of shares.   Unlike the other valuation ratios, this particular ratio utilizes the cash flows statement in determining the outcome.   The formula is simple:

Price to Cash Flow = $Market Price of a Share of Stock/Cash Flow in Dollars Per Share of Stock

Activity Ratios

The majority of activity ratios measure the ability of the company to turn assets into earnings.   All businesses utilize a simple principle, buy an asset at a low price and sell it at a higher price.   Even service based businesses do this.  Labor is purchased for a certain value and then sold for a much higher price.   Retail businesses purchase inventory and then turn around, mark it up and then sell it to make a profit.   There isn’t any business out there that doesn’t exercise this basic business principle.

Job Costing Reports – Introduction (Part 1)

Job Cost Reports

Job costing reports are management tools used to evaluate project or production performance against a known or estimated standard.   They are used in many business sectors and their respective industries.   The primary purpose of job costing reports is to identify discrepancies or beneficial results, usually in the form of financial values.   They can be used to report both financial and numerical production outcomes.

Business Principles – A Pyramid of Levels

Business Principles

There is no universal finite set of business principles.   In the aggregate, there are over several hundred of them.   Many of them are not applicable to every industry, on the contrary, many are specific to a unique business or industry.   The best approach to understanding business principles is to look at this in a holistic manner, i.e. overall doctrine down to a few rules specifically designed for that one business.

Liquidity Ratios

Liquidity Ratios

Liquidity ratios are a group of ratios used to measure the ability of a business operation to meets its current obligations.   Liquidity ratios are similar to the initial medical tests a patient receives at a doctor’s visit.   Doctors take blood pressure, temperature, and pulse rate.   The doctor wants assurance that the primary indicators of health are good.  Liquidity ratios are exactly the same.  The user wants to know that the basic measurements of a business indicate good health today.

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