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UNLOCKING THE MAGIC OF NUMBERS UNLOCKING THE MAGIC OF NUMBERS DR. GEORGE WEBSTER EXECUTIVE EDUCATION FOOD MARKETING ST. JOSEPH’S UNIVERSITY
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2 VALUE CREATION IN THE FOOD INDUSTRY What is value creation? What are the drivers of value creation ? How do we measure value creation?
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3 WHAT IS VALUE CREATION? Process Involves decision making –Financing –Investing –Operating Includes all stakeholders
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4 “THE SCORECARDS” BALANCE SHEET - a statement of position at a point in time –Shows what we own and what we owe –Of particular interest to the CFO INCOME STATEMENT - a statement of value creation over time –Measures how well we operated –Of particular interest to the CEO CASH FLOW STATEMENT - puts operations on a cash basis –Gives sources and uses of cash –Of particular interest to the COO
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5 BALANCE SHEET- FACSIMILE COMPANY DECEMBER 31, 19XX ASSETS LIABILITIES & O.E. CURRENT ASSETS CURRENT LIABILITIES Cash 3000 Accts. Payable 2000 Accts. Rec. 2000 Wages Payable 1000 Inventory 8000 13000 Rent 1000 4000 LONG TERM P & E 25000 Long Term Debt 7000 Other 4000 OWNER’S EQUITY TOTAL 29000 Common Stock 5000 Ret. Earnings 26000 TOTAL 31000 TOTAL ASSETS 42000 TOTAL LIAB. & OE 42000
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INCOME STATEMENT- FASCIMILE CO. FOR THE YEAR ENDED 12/31/XX NET SALES 55000 LESS: COST OF GOODS 35000 GROSS MARGIN 20000 LESS: OPERATING EXPENSES Salaries 5000 Rent Expense 1000 S.,G., & A. 4000 10000 OPERATING PROFIT 10000 LESS: INCOME TAX (.40) 4000 NET INCOME AFTER TAX 6000
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STATEMENT OF CASH FLOWS-FASCIMILE CO. FOR THE YEAR ENDED 12/31/XX CASH FROM OPERATIONS Net Income 2000 Depreciation 500 2500 CASH FROM INVESTING ACTIVITIES Capital Expenditures 5000 Acquisitions 15000 (20000) CASH FROM FINANCING ACTIVITIES Issuance of Long Term Debt 700 Sale of Common Stock 11500 Cash Dividends 400 11800 NET CHANGE IN CASH (5700)
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8 HOW WE MEASURE VALUE CREATION ROI - Return on investment ROE - Return on equity EPS - Earnings per share EVA - Economic value added
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9 WHAT ARE THE DRIVERS OF VALUE? EFFECTIVENESS - How much revenue do we generate from the assets we have? EFFICIENCY - How well do we use the assets we own? LEVERAGE - How much debt do we have in the capital structure?
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10 EFFECTIVENESS EFFECTIVENESS = Total Sales Total Assets A&P - 1998 Effectiveness is 3.43 A&P - 1996 Effectiveness is 3.50 A&P -1998 $10,262,199,000 $$2,995,253,000 =
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11 EFFICIENCY EFFICIENCY = Net Income Total Sales A&P - 1998 Efficiency is.0062 A&P - 1996 Efficiency is.0057 A&P 1998 = $63,586,000 $10,262,199,000
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12 LEVERAGE LEVERAGE = Total Assets Owner’s Equity A&P - 1998 Leverage is 3.23 A&P - 1996 Leverage is 3.50 A&P -1998 = $2,995,253,000 $926,632,000
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13 RETURN ON EQUITY RETURN ON EQUITY = Net Income Owner’s Equity (Effectiveness) X (Efficiency) X (Leverage) Total Assets Owner’s Equity Sales Total Assets X Net Income Sales X A&P 1998 ROE = $63,586,000 / $926,632,000 =.069 = 3.43 X.0067 X 3.23 =.069
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14 RETURN ON INVESTMENT RETURN ON INVESTMENT = Net Income Total Assets ROI = Net Income Sales X Total Assets ROI = Net Margin X Asset Turnover A&P 1998 ROI =.0062 X 3.42 =.02 A&P 1996 ROI =.0057 X 3.50 =.02
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15 THE F-I-O MODEL FINANCING - the process of obtaining capital for the business INVESTING - the process of asset acquisition to operate the business OPERATING - using resources to maximize shareholder wealth
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16 (Effectiveness) X (Efficiency) X (Leverage) HOW WE MEASURE VALUE CREATION Total Assets Owner’s Equity Sales Total Assets X Net Income Sales X Investing OperatingFinancing FIO MODEL (Asset Turnover) X (Net Margin) X (Degree Financial Leverage)
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17 EARNINGS PER SHARE EARNINGS PER SHARE = Earnings Shares of Common Stock Outstanding A&P 1998 EPS = $1.66 A&P 1996 EPS = $1.50 Market Measure Unambiguous Represents per Share Value Creation
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18 OPERATING PROFIT (EBIT) EBIT = OPERATING PROFIT/ SALES EBIT measures operating profitability including depreciation Average for cohort group = 6.4%
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19 EBIT - A&P EBIT = $144,215,000/ $10,262,199,000 =.01 BEST PRACTICE FOR COHORT GROUP IS ALBERTSONS ; EBIT =.083
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20 EBITDA EBITDA = Operating Profit before Depreciation/ Net Sales EBITDA measures operating profitability excluding depreciation. Industry average = 4.87% Average for cohort group = 4.5%
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21 EBITDA FOR A&P EBITDA = 378,451,000/ 10,262,199,000 =.037 BEST PRACTICE FOR COHORT GROUP IS ALBERTSONS ; EBITDA = =.061
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22 NET MARGIN NET MARGIN = NET INCOME/ SALES Net Profit Margin measures the portion of the firm’s sales dollar remaining after it pays all expenses Industry average = 1.22% Average of cohort group = 2.3%
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23 NET MARGIN- A&P NET MARGIN = $63,042,000/$10,262,199,000 =.62% BEST PRACTICE FOR COHORT GROUP IS ALBERTSONS NET MARGIN = 3.52%
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24 RETURN ON TOTAL ASSETS RETURN ON TOTAL ASSETS = NET INCOME TOTAL ASSETS MEASURES THE ABILITY OF A COMPANY’S COMBINED EQUITY CAPITAL AND DEBT SECURITIES TO GENERATE PROFITS Industry average = 3.64% Average of cohort group = 7.1%.
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25 RETURN ON ASSETS- A&P RETURN ON ASSETS = $63,042,000/$2,973,679,245 =.0212 BEST PRACTICE FOR COHORT GROUP IS ALBERTSONS RETURN ON ASSETS =.099
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26 RETURN ON EQUITY RETURN ON EQUITY = NET INCOME/ OWNER’S EQUITY RELATES COMPANY EARNINGS SPECIFICALLY TO THE RESOURCES PROVIDED BY ITS OWNERS Industry average = 16.03% Average of cohort group = 29.7% (with Kroger) Average of cohort group = 22.5% (w/o Kroger)
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27 RETURN ON EQUITY- A&P RETURN ON EQUITY = $63,042,000/ $926,632,000 = 6.9% BEST PRACTICE FOR COHORT GROUP IS AHOLD RETURN ON EQUITY = 30.22%
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28 ASSET TURNOVER ASSET TURNOVER = NET SALES/TOTAL ASSETS ASSET TURNOVER IS USED TO MEASURE THE FIRM’S ABILITY TO USE ITS ASSETS TO GENERATE SALES Industry average = 2.98 TIMES Average of cohort group = 3.05 TIMES
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29 ASSET TURNOVER - A&P ASSET TURNOVER =$10,262,199,000 /$2,973,679,245 = 3.42 BEST PRACTICE FOR COHORT GROUP IS; KROGER ASSET TURNOVER = 4.38
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30 DEBT TO EQUITY DEBT TO EQUITY = TOTAL LIABILITIES/ TOTAL EQUITY THE DEBT-TO-EQUITY RATIO INDICATES THE DEGREE OF DEPENDENCE ON CREDITORS, RATHER THAN OWNERS, IN PROVIDING FUNDS TO OPERATE THE BUSINESS. Industry average = 3.17 TIMES Average of cohort group = 3.16 TIMES
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31 DEBT TO EQUITY - A&P DEBT TO EQUITY = $ 2,068,620,000/ $926,632,000 = 2.23 BEST PRACTICE FOR COHORT GROUP IS; ALBERTSONS DEBT TO EQUITY = 1.16
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32 CURRENT RATIO CURRENT RATIO = CURRENT ASSETS/ CURRENT LIABILITIES CURRENT RATIO INDICATES THE ABILITY OF A COMPANY TO MEET ITS CURRENT OBLIGATIONS Industry average = 1.05 Average of cohort group =.96
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33 CURRENT RATIO - A&P CURRENT RATIO = $1,217,000,000/ $955,130,000 = 1.27 BEST PRACTICE FOR COHORT GROUP IS; FOOD LION CURRENT RATIO = 1.40
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34 QUICK RATIO QUICK RATIO = (CURRENT ASSETS - INVENTORY) CURRENT LIABILITIES QUICK RATIO MEASURES THE RELATIONSHIP BETWEEN CASH, CURRENT RECEIVABLES,AND MARKETABLE SECURITIES TO CURRENT LIABILITIES. IT INDICATES A COMPANY’S ABILITY TO DISCHARGE ITS CURRENT OBLIGATIONS WITHOUT THE NEED TO SELL OFF INVENTORIES. Industry average =.32 Average of cohort group =.28
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35 QUICK RATIO - A&P QUICK RATIO = ($1,217,227,000 - $882,229,000)/ $$955,130,000 =.31 BEST PRACTICE FOR COHORT GROUP IS; PUBLIX SUPERMARKETS QUICK RATIO =.66
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36 GROSS MARGIN RETURN ON INVENTORY (GMROI) GMROI COMBINES BOTH GROSS MARGIN PERCENT AND INVENTORY TURNS INTO ONE NUMBER. Industry average = 466% Average of cohort group = 360% GMROI = GROSS MARGIN/ AVERAGE INVENTORY
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37 GMROI - A&P GMROI = $3,169,070,000/ $882,229,000 = 223% BEST PRACTICE FOR COHORT GROUP IS; SAFEWAY GMROI = 426%
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38 CASH CONVERSION CYCLE CASH CONVERSION CYCLE = INVENTORY CONVERSION PERIOD + RECEIVABLES COLLECTION PERIOD - PAYABLES DEFERRAL PERIOD. THE CASH CONVERSION CYCLE THUS EQUALS THE LENGTH OF TIME THE FIRM HAS FUNDS TIED UP IN ITS CURRENT ASSETS. Average of cohort group = 10 days Assumes a 30 day payables deferral period. Cash conversion cycle - A&P = 32 days
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39 ACTIVITY/PERFORMANCE/ LEVERAGE MEASURES Retailer Producer Distributor ACTIVITY Inventory Turnover 10.61 5.32 14.2 Receivables Turnover 100.3 12.24 27.21 Total Asset Turnover 3.05 1.21 3.99 PERFORMANCE Net Margin (%) 1.22 10.76 1.47 Return on Assets (%) 3.64 13.13 4.91 Return on Equity (%) 29.7 38.40 14.06 LEVERAGE Total Assets/ Equity 4.16 3.09 3.39
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40 ECONOMIC VALUE ADDED Measures real profitably- on a cash basis Measures the cost of equity- not shown on balance sheets Cost of equity is its opportunity cost- what the investors could do in their next best alternative Capital includes long term debt, preferred stock, and common stock Cost of capital is its weighted average
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41 ECONOMIC VALUE ADDED ECONOMIC VALUE ADDED = [Net Operating Profit After Tax - After Tax Dollar Cost of Capital] Net Operating Profit After Tax = Operating Profit - Income Tax Cost of Capital = Weighted After Tax Cost of Capital Capital = Total Capital Employed = Common and Preferred Stock + Long Term Debt After Tax Dollar Cost of Capital= Cost of Capital (%) X Capital
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42 ECONOMIC VALUE ADDED A&P - 1998 NET INCOME AFTER TAX = $63,586,000 LESS: COST OF CAPITAL - $111,196,000 EQUALS: ECONOMIC VALUE ADDED ($47,610,000)
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43 EVA- Selected Firms Safeway $431,000,000 Kroger $(47,000,000) Coca-Cola $782,000,000 Nabisco $(1,926,000,000) RichFood $2,000,000 NashFinch $(18,000,000) Company NameEconomic Value Added
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