Key Financial Qs Are You Making Enough Profit Liquidity Enough Money on hand to rungrow your co Leverage ideally proportioned betw Debt amp Equity How effectively are you utilizing your assets ID: 573750
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Slide1Slide2
Ascertain Financial Health of Your Company Slide3
Key Financial Q’s:
Are You Making Enough
Profit
?
-
Liquidity
?
Enough Money on hand to run/grow your co.
-
Leverage
?
ideally proportioned
betw
. Debt & Equity?
How effectively are you utilizing your assets?
A/T
R U providing your investors an Adequate Level of Return?
How close are you to
Bankruptcy?
How’s those
Bond Ratings
?Slide4
Various Measures of Your PROFITABILITY
Profitability Ratios:
ROS
--- Profit/ Sales
ROA
— Profit/ Assets
ROE
– Profit/ Equity
Net Profits
Cum ProfitsSlide5Slide6
NET PROFITS $$
Year 1 $6 million
Year 2 $8 million
Year 3 $10 million
Year 4 $12 million
Year 5 $16 million
Year 6 $21 million
Year 7 $27 million
Year 8 $35 millionSlide7
Return on Equity
=
net profit
equity
Profitability * Asset Mgt * Leverage
As measured by ROE
Encompasses the 3 main levers used by mgt to generate return on investors equitySlide8
Du Pont Formula
Return on Equity =
net profit
equity
net profit
sales
sales
assets
assets
equity
x
x
Value ChainSlide9
Du Pont Formula
Return on Equity =
net profit
equity
net profit
sales
sales
assets
assets
equity
x
x
Value ChainSlide10
Ratio
World Class
Top
10 cut
Mean
Poor
ROE*
600%+
100%+
~20%
<15%Slide11
Return on Equity
=
net profit
equity
Profitability * Asset Mgt * Leverage
As measured by ROE
Encompasses the 3 main levers used by mgt to generate return on investors equitySlide12
net profit
sales
sales
assets
assets
equity
x
x
Value Chain
Profitability * Asset Mgt * Leverage
Improve ROE by:
Increase sales
&/or
reduce
&/or
eff.
work
assets
Improving Margins
Increasing LeverageSlide13
…….
below 30%,
Problem =
Marketing
(customers hate your products)
Production
(your labor & material costs too high),
&or
Pricing
(you cut price too much).
IF:
Contribution Margin
(Sales- variable costs) / salesSlide14
Contribution Margin is above 30%…
but Net Margin is below 20% …
Net Margin = Sales - (Variable Costs + Period (Fixed) Costs) / Sales
Problem
= heavy expenditures on
Depreciation
(perhaps you have idle plant)
& or heavy expenditures on
SGA
(perhaps you’re pushing into diminishing returns on Promo & Sales Budgets).
IF:Slide15
7-17%Slide16
Net Margin above 20%,
but
ROS (net profit) below 5%.. --
you either experienced some
extraordinary "Other" expense
like a write-off on plant you sold
or you are paying
too much Interest
(…you may also have spent heavily on
TQM initiatives
).
IF:Slide17
net profit
sales
sales
assets
assets
equity
x
x
Value Chain
Profitability * Asset Mgt * Leverage
Improve ROE by:
Increase sales
&/or
reduce
&/or
eff.
work
assets
Improving Margins
Increasing LeverageSlide18
“Generically, profits are driven by the company’s asset base and by its efficiency working those assets”Slide19Slide20
Asset Turnover
Reveals how effective assets are at generating sales revenue.
The higher the better
=
more efficient use of assets
Asset Turnover
=
sales
assets
Currently you are generating $1.05 in sales for every $1 assetsSlide21
net profit
sales
sales
assets
assets
equity
x
x
Value Chain
Profitability * Asset Mgt * Leverage
Improve ROE by:
Increase sales
&/or
reduce
&/or
eff.
work
assets
Improving Margins
Increasing LeverageSlide22Slide23
Assets/Equity – simulation takes owner's perspective.
A Leverage of 3.0 says, "For every $3 of Assets there is $1 of Equity
Leverage
Assets
Debt
Equity
1.0
$1
$0
$1
2.0
$2
$1
$1
3.0
$3
$2
$1
4.0
$4
$3
$1
LEVERAGE:
1.8 to 2.8
Optimal
Corp assets fin.w/ debtSlide24
How effective/aggressive R-U in building your Co’s asset base…
It takes $$ to Make $$
&-why not make it using somebody else's…. To help you make even more…Slide25
“Generically, profits are driven by the company’s asset base and by its efficiency working those assets”Slide26
Page 3Slide27
How effective will you be in building your Co’s asset base?
At
outse
t should be spending
~$10-25M / round
on plant improvement
By
end
should expand asset base to min
$140M to $160M
+Slide28
AAA/AA/A/BBB/
…
BB & beyond is Junk… B/CCC /CC/C/D
= default
As your
debt-to-assets
ratio increases… Your short term interest rate increases…
For
each additional .5% increase in interest
-
You
drop one category
The More Assets you have the better your Bond RatingsSlide29
Stock Price
Profit$ Slide30
STOCK PRICE Function of:
Earnings per Share
Net Profit
/
#
Shares
Book Value
Equity
/
# Shares
Dividend Policy Good Dividend Policy