2. Ascertain Financial Health of Your Company

3. 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?
Do you have Adequate Levels of Investment in your Company's Plant, People & Processes?

4. Various Measures of Your PROFITABILITY
Profitability Ratios:
ROS--- Profit/ Sales
ROA— Profit/ Assets
ROE– Profit/ Equity
Net Profits
Cum Profits

6. 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 million

7. Profitability * Asset Mgt * Leverage
As measured by ROE
Return on Equity =
net profit
equity
Encompasses the 3 main levers used by mgt to generate return on investors equity
Profitability * Asset Mgt * Leverage

8. x x Du Pont Formula net profit equity Return on Equity = net profit
sales
sales
assets
assets
equity x x

9. Du Pont Formula
Return on Equity =
net profit
equity
sales
assets x

10. Ratio
World Class  
Top
10 cut
Mean
Poor 
ROE*
600%+
100%+
~20%
<15%

11. Profitability * Asset Mgt * Leverage
As measured by ROE
Return on Equity =
net profit
equity
Encompasses the 3 main levers used by mgt to generate return on investors equity
Profitability * Asset Mgt * Leverage

12. Profitability * Asset Mgt * Leverage
Improve ROE by:
Value Chain
Profitability * Asset Mgt * Leverage
net profit
sales
assets
equity x
Increase sales &/or
reduce &/or eff. work assets
Improving Margins
Increasing Leverage

13. IF: Contribution Margin
(Sales- variable costs) / sales
……. below 30%,
Problem =
Marketing (customers hate your products)
Production (your labor & material costs too high),
&or Pricing (you cut price too much).

14. 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).

15. 7-17%

16. IF: 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).

17. Profitability * Asset Mgt * Leverage
Improve ROE by:
Value Chain
Profitability * Asset Mgt * Leverage
net profit
sales
assets
equity x
Increase sales &/or
reduce &/or eff. work assets
Improving Margins
Increasing Leverage

18. “Generically, profits are driven by the company’s asset base and by its efficiency working those assets”

20. The higher the better = more efficient use of assets
Asset Turnover
Reveals how effective assets are at generating sales revenue.
The higher the better = more efficient use of assets
Currently you are generating $1.05 in sales for every $1 assets
sales
assets
Asset Turnover =

21. Profitability * Asset Mgt * Leverage
Improve ROE by:
Value Chain
Profitability * Asset Mgt * Leverage
net profit
sales
assets
equity x
Increase sales &/or
reduce &/or eff. work assets
Improving Margins
Increasing Leverage

23. Assets/Equity – simulation takes owner's perspective.
LEVERAGE:
Assets/Equity – simulation takes owner's perspective.
Corp assets fin.w/ debt
Optimal
Leverage
   
Assets
Debt
Equity
1.0 $1 $0
2.0 $2
3.0 $3
4.0 $4
A Leverage of 3.0 says, "For every $3 of Assets there is $1 of Equity
1.8 to 2.8

24. 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…

25. Page 3

26. How effective will you be in building your Co’s asset base?
At outset should be spending ~$10-25M / round on plant improvement
By end should expand asset base to min $140M to $160M+

27. For each additional .5% increase in interest -You drop one category
The More Assets you have the better your Bond Ratings
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

28. Stock Price
Profit$

29. STOCK PRICE Function of:
Earnings per Share
Net Profit / # Shares
Book Value
Equity / # Shares
Dividend Policy Good Dividend Policy
STOCK PRICE Function of:

30. Evaluate Your Company’s Financial Situation & Formulate Financial Strategy & Set Objectives...