Business Finance
Time Value of Money, Financial Ratios & Investment Analysis
In This Lesson
Time Value of Money
Core Principle
Money today is worth more than the same amount in the future due to its potential earning capacity.
Simple Interest
I = P × r × t
A = P + I = P(1 + rt)
- P = Principal (initial amount)
- r = Interest rate (decimal)
- t = Time (in years)
- I = Interest earned
- A = Total amount
Compound Interest
A = P(1 + r/n)^(nt)
- n = Compounding frequency per year
- Monthly: n = 12
- Quarterly: n = 4
- Semi-annually: n = 2
- Annually: n = 1
Present Value vs Future Value
Future Value (FV)
FV = PV × (1 + r)^n
What today's money will be worth later
Present Value (PV)
PV = FV / (1 + r)^n
What future money is worth today
Example Calculation
If you invest ₱10,000 at 8% annual interest compounded quarterly for 3 years:
A = 10,000(1 + 0.08/4)^(4×3) = 10,000(1.02)^12 = ₱12,682.42
Financial Ratios
Liquidity Ratios
Measure ability to pay short-term obligations
Current Ratio
Current Assets / Current Liabilities
Ideal: 2:1
Quick Ratio (Acid Test)
(CA - Inventory) / CL
Ideal: 1:1
Profitability Ratios
Measure ability to generate profit
Gross Profit Margin
(Revenue - COGS) / Revenue × 100
Net Profit Margin
Net Income / Revenue × 100
Return on Assets (ROA)
Net Income / Total Assets × 100
Return on Equity (ROE)
Net Income / Equity × 100
Solvency Ratios
Measure long-term financial stability
Debt Ratio
Total Liabilities / Total Assets
Lower is better
Debt-to-Equity Ratio
Total Liabilities / Total Equity
Ideal: below 2:1
Efficiency Ratios
Measure how well assets are utilized
Inventory Turnover
COGS / Average Inventory
Asset Turnover
Revenue / Total Assets
Working Capital Management
Working Capital Formula
Working Capital = Current Assets - Current Liabilities
Positive WC means the business can meet short-term obligations
Current Assets
- Cash and Cash Equivalents
- Accounts Receivable
- Inventory
- Prepaid Expenses
- Marketable Securities
Current Liabilities
- Accounts Payable
- Short-term Loans
- Accrued Expenses
- Current Portion of Long-term Debt
- Unearned Revenue
Cash Conversion Cycle
CCC = Days Inventory + Days Receivable - Days Payable
Shorter cycle means faster cash recovery
Investment Decisions
Return on Investment (ROI)
ROI = (Gain - Cost) / Cost × 100
Measures the percentage return on an investment
Payback Period
Payback Period = Initial Investment / Annual Cash Flow
Time required to recover the initial investment
Net Present Value (NPV)
Sum of present values of all cash flows minus initial investment
- NPV > 0: Accept the project (profitable)
- NPV < 0: Reject the project (loss)
- NPV = 0: Indifferent (break-even)
Types of Investments
- Stocks: Ownership in a company
- Bonds: Debt instrument, fixed interest
- Mutual Funds: Pooled investment vehicle
- Real Estate: Property investment