Media Economics-J771

What is market-driven journalism?

Use of financial considerations, including relationships w/ advertisers, as a primary determinant of news content in a newspaper.

The development of new media continues to change the way info flows from info producers to consumers. We see this today through the convergence of print & broadcast advances in digital & interactive media.

What are the pros of market-driven journalism?

-Media needs advertising to be able to function; can’t have one w/o the other

What are the cons of market-driven journalism?

-Success = profit
---Run like a business (a.k.a the way that makes the most profit)
---Shareholders & parent corporations shape policy
---Overshadow original purpose of media (4th estate)
-Advertisers control “newsworthiness”
---Ex.: Magazine may not publish something b/c advertiser who disagrees could pull ads
---Use of advertorials (editorial combined w/ ad content)
---Agenda-setting agent in favor of advertisement sponsor
-----Ethical issue: Deceiving readers by disguising ad as editorial content
-Journalists not reporting independently or objectively

What is the logic behind financial ratios?

To assess financial health of company/organization to compare current ratios for the firm to trends, & the ratios of the firm to norms for the industry.

Deysher Analysis

1. Sales declining but earnings rising (indicates firm is pruning away low margins or unprofitable business)

2. Sales & earnings rising, BUT earnings rising faster than sales (ideal; indicates firm is leveraging its infrastructure)

3. Net debt (defined as short-term & long-term debt less cash & marketable securities) is no more than 50% of total capital (where total capital is equity & convertibles plus net debt)

4. Net working capital (a measure of liquidity, defined as current assets minus current liabilities) should be positive year-to-year. (Bankruptcy usually occurs when a firm can't meet current liabilities)

5. Shareholder’s equity should be growing

6. Return on equity (ROE): the higher the better (red flag on companies that generate high ROE by using debt that's excluded from denominator); the definition of ROE doesn't include debt in the denominator but return on capital would reflect all sources of capital including debt

7. Return on capital (defined as equity, convertible securities & debt

Liquidity Ratios

Indicate solvency, or the ease w/ which an asset can be converted to cash. A liquid company owns enough assets to cover its obligations.

Current Ratio

Compares a firm's current assets to its current liabilities.
(Current ratio = Current assets/Current liabilities)

-# carried to 2 decimal places
-Higher = better
---More liquid
---Less risk of financial trouble
-Too high of a # can indicate bad things:
---Unnecessary investment in current assets
---Inability to collect on accounts receivables
---Inability to meet current liabilities

Quick Ratios

Indicates firm's short-term liquidity; excludes inventory & less liquid assets.
([Cash + Marketable securities + Accounts receivable]/Current liabilities)

-# carried to 2 decimal places
-Required pieces for the formula can be found on balance sheet
-Higher = better
---more liquid

Asset Management Ratios

Measure how well a company manages what they own.

-Required formula pieces found on balance sheet w/ exception of sales & cost of goods sold, which are found on income statement
- Expressed as #'s carried to 2decimal places

Asset Turnover Ratios

Measure how well the company's assets generated sales for the period.
[Sales/Average total assets = (latest fiscal period + preceding fiscal period)/2]

-Too low # = low productivity levels
-Too high # = insufficient assets for growth & sales generation

Inventory Turnover Ratios

Estimated # of times inventory is used & replenished during a period.
(COGS/Average Inventory)

-High = best
---Add. expenses incurred when they stay in company’s possession for an extended period of time
---Industry specific

Profitability Ratios

Assess a business' ability to generate earnings in comparison w/ expenses as well as other relevant costs incurred during a given time period.

- Expressed as % carried to 2 decimal places
- Formula parts found on company’s income statement

Gross Profit Margin

Analyzes a company's gross income compared to its sales for a given time period.
(Gross margin = [Sales-COGS]/Sales)

-High margin & stable over time = best
---Greater the company’s expected profitability

Operating Profit Margin

Compares operating income of company to sales for a given period; examines relationship b/w management-controllable costs & sales before taxes, interest & non-operating expenses.
(Operating Margin = Operating Income/Sales)

-High margin & stable over time = best

Debt Ratios

Indicate what proportion of debt company has relative to its assets; tells ab leverage of company along w/ potential risks company faces in terms of amt of debt they carry.

-Found on balance sheet
-Expressed as % carried to 2 decimal places

Total Liabilities to Total Assets

Measures % of assets financed by all debt types; both for current & long-term.
(Total liabilities/Total assets)

-Small = better
---Higher = greater the potential variability of earnings = greater likelihood for firm to default on obligations.

Long-Term Debt to Equity

Indicates what proportion of firm's capital derived from debt as compared to equity.
(Long-term debt/Total common equity)

-Small = best
---High = increased volatility of earnings = higher probability that the firm will default on debt
---Long-term debts are liabilities due in a year or more