1. Agenda 14 December 2002 9:30 Call to Order 9:35 Minutes 9:40 Treasurer’s Report 9:45 Old Business –Value Line 10:00 New Business 10:10 Education 10:30 Medical Services Industry 11:20 Portfolio Review 11:20 Investments Review 11:30 Adjourn

2. INVESTIGATING RED FLAGS in Section 2B of the SSG Education Segment Cincinnati Investment Model Club

3. Section 2B Return on Equity Section 2B tells us how good management is at spending money; that is, spending money in a way that increases the value of the company. As the value of the company increases, the value of our share of the company increases.

4. The Problem The trend in Section 2B is down. Don’t ignore the problem. Do find out what has happened

5. The Return on Equity is decreasing A company can increase the ROE in three ways: –increase the net profit margin –increase the financial leverage –increase the asset turnover rate If any one of these drops, the ROE could go down

6. Net Profit Margin Net profit margin is the amount of profit generated for every dollar of sales. The net profit can either be given to the owners as a dividend or kept by management to continue growing the company. To find the net profit margin divide the net profit by the sales. The numbers are found in the Income Statement

7. Net Profit Margin The Net Profit Margin for the last 3 years was 15%, 16%, & 17%. The Net Profit margin is not creating the problem in ROE.

8. Net Profit Margin The net profit margin restates all the conclusions made about management in Section 2A. If there were a problem with the net profit margin you would check the cost of goods sold and the operating expenses in the MD & A section of the annual report or 10K to find out what happened.

9. Financial Leverage (Borrowed Money) A company can increase its ROE by borrowing money. The trade off is that increased debt brings with it higher risk. To determine the financial leverage divide the Total Assets by the Equity. These numbers are found on the Balance Sheet.

10. Financial Leverage The Financial Leverage ratio decreased a small amount from 2.71 in 2000 to 2.3 in 2001. This is not the problem in ROE.

11. Financial Leverage If the problem were caused by a change in the financial leverage you would check the MD & A section and the Notes to Finances and Cash Flow Statement to find out what the borrowed funds were used for. Borrowed money should increase the value of the company.

12. Asset Turnover Rate Asset Turnover is the amount of sales generated per dollar of assets (sales divided by assets). Sales number is found on the Income Statement. Total Assets is found on the Balance Sheet in the Annual Report or 10K.

13. Asset Turnover Rate Asset Turnover Rate in 2000 was 1.03. In 2001 it was.76. The total value of the assets grew much faster than the sales. The company was generating less sales for the amount of their assets. This is one cause in the decrease in ROE.

14. Asset Turnover Rate Higher numbers are better Compare with other companies in their industry. The company generating more sales with each $ of assets is making their money work the hardest.

15. Now we know the problem. The decrease in the ROE was caused by a decrease in the asset turnover ratio. Let’s take a closer look at Assets and see why they grew faster than sales.

16. Sales grew 17% from 2000 to 2001 so we would expect assets to grow about that much also Grew 32% Grew 18.5% Grew 17%

17. Let’s take a closer look at the current assets Cash decreased 40.5%. Short term investments grew 18%. Accounts receivables grew 38%. Deferred taxes grew 66% These are tax payments that are postponed from this year to a later year (not withheld payroll taxes) Other current assets grew 44%. Cash went down while accounts receivable and deferred taxes went up significantly.

18. Wrap Up When the arrow for ROE (Row 2B) is down, do not reject the company but find out why: –A decrease in the net profit margin –A decrease in the financial leverage –A decrease in the asset turnover rate Then decide if this is a major or long term problem or just a short term problem.