Finance: Investment and Inventory Turnover Ratio Essay

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Assignment Week 8: Understanding the Concepts
April Van Buren
Karin Torres
FIN100
02/23/2013

When being a business owner, there are many things to consider. You will need to know some financial ratios to sufficiently run your business as well as investment procedures. As a small business owner, you would want to make sure your investment return gets back to you as soon as possible. This is to ensure that all funds for the company are maximized and accounted for. Some financial ratios to use would be inventory turnover ratio, return on investment, and profit percentage. Inventory turnover ratio is said to be the most important ratio in business. It measures the liquidity of the businesses inventory and manages the selling of the inventory. The inventory turnover ratio can help a business determine how to increase their sales (Peavler). The return on investment is determined by dividing net profit by total assets. This is the most common profitability ratio (Return). As the return on investment is the most common profitability ratio, the profit percentage is the most widely used. “It represents how much of sales revenue is spent on providing the goods or services sold” (Gross). The profit percentage tells a business how much revenue is left after operating costs. These three financial ratios are important for small businesses and large corporations. Debt financing is borrowing money to be repaid in full with interest. There are advantages and disadvantages with debt financing. It can be helpful to businesses with good credit and stable revenue. This allows the company to borrow money with a lower interest rate. Disadvantages are that debt financing could affect the cash flow of a company and reduce flexibility. A company could also choose to issue stocks or bonds to generate funds. There are advantages and disadvantages for both stocks and bonds. Stocks are a bit more complex than bonds. Stocks are shares of ownership of a company and allow the stockholder to vote on company issues. Stockholders have the option to sell their share when they are able to make a profit. Until then, they are considered part of the company. Bonds are a way of earning quick money for a quick inflow of capital. “The bond-issuer pays bond-holders a specified amount of interest each year, then repays the face value of the bond — the amount the investor originally gave the issuer — at the end of a specific period.” (Ingram) For quick capital gains, you can trade bonds on the bond market. Both stocks and bonds offer company’s the money they need for their business. However, they both have more risk they a regular loan from a bank. Most companies would choose to issue stocks rather than bonds because stocks can be definite. Financial returns and risk go hand-in-hand. In order to get a higher financial return, there is higher risk involved. However, just because you invest at a higher risk does not mean you will receive a higher return. You may not even receive a return at all. “In the view of the world’s leading investment researchers, you bias your chances in favor of obtaining higher returns by only taking risk that has been reliably rewarded in the past and can be expected to be rewarded in the future. There are risks worth taking and risks that are not.” (Risk) “Beta is a historical measure of the volatility or systematic risk of a stock and how it relates to the market as a whole. In simpler terms, beta provides a guideline of how a stock should typically “move” with the market based on the data collected and analyzed.” (Derrick) There are different measures of beta. If a beta measures 1, then it means the stock will be less volatile in the market and a beta that measures greater than 1 means it will measure more volatile in the market. If beta measures 1.5 then based on historical information the stock will rise 15% because the market rose 10%. There are advantages and disadvantages with high and low beta stocks. A more stable
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