M A N A G E M E N T The Big Picture Situation/SW OT Analysis S I M U L A T I O N Strategic Planning • Company • Consumers • Competitors • Conditions • PEST Growth & Competiti ve Strategi es Function al Integratio n Function al Integrati Marketin on g R&D Producti on HR Finance Performan ce Assessme nt Ø Profits Ø Mrkt Share Ø ROA Ø ROS Ø ROE Ø Asset T/O Ø Stock Ø Mrkt Cap
M A N A G E M E N T S I M U L A T I O N
M A N A G E M E N T S I M U L A T I O N Asc erta Hea in Fina lth o ncia Com f Your l pan y
M A N A G E M E N T S I M U L A T I O N Key Financial Q’s: 1. Are You Making Enough Profit? 2. Liquidity? Enough Money on hand to run/grow your co. 3. Leverage? ideally proportioned betw. Debt & Equity? 4. How effectively are you utilizing your assets? A/T 5. R U providing your investors an Adequate Level of Return? 6. How close are you to Bankruptcy? 7. How’s those Bond Ratings?
The Capstone Courier
M A N A G E M E N T S I M U L A T I O N
Various Measures of Your PROFITABILITY n n Profitability Ratios: ROS--- Profit/ Sales ROA— Profit/ Assets ROE– Profit/ Equity ØNet Profits ØCum Profits
M A N A G E M E N T S I M U L A T I O N
NET PROFITS $$ • Year 1 $6 million • Year 2 $8 million • Year 3 $10 million • Year 4 $12 million • Year 5 $16 million • Year 6 $21 million CUM PROFIT General Range: $20 to $100
Main ratio of Profitability Return on Sales = net profit net sales “ROS indicates percentage of each sales dollar that results in net income. ”
Return on Assets net profit Return on Assets = assets “ROA measures company’s ability to use its assets to generate earnings. ”
As measured by ROE Return on Equity = net profit equity Encompasses the 3 main levers used by mgt to generate return on investors equity Profitability * Asset Mgt * Leverage
Du Pont Formula Value Chain net profit Return on Equity = net profit sales x sales assets equity x assets equity
Du Pont Formula Value Chain net profit Return on Equity = net profit sales x sales assets equity x assets equity
Improve ROE by: Value Chain Profitability * Asset Mgt * Leverage net profit sales Improving Margins x sales assets Increase sales &/or reduce &/or eff. work assets x assets equity Increasing Leverage
Ratio ROE* World Class Top 10 cut 600% 100% + + Mean ~20% Poor <15%
“Generically, profits are driven by the company’s asset base and by its efficiency working those assets”
How effective will you be in building your Co’s asset base? n n At outset should be spending ~$10 -25 M / round on plant improvement By end should expand asset base to min $140 M to $160 M+
How effective/aggressive RU in building your Co’s asset base… It takes $$ to Make $$ &-why not make it using somebody else's…. To help you make even more…
LEVERAGE: Assets/Equity – simulation takes owner's perspective. Corp assets fin. w/ debt A Leverage of 3. 0 says, "For every $3 of Assets there is $1 of Equity Optimal Leverag Assets e Debt Equit y 2. 0 1. 8 to 2. 8 3. 0 $3 $2 $1 4. 0 $4 $3 $1 1. 0 $1 $0 $1 $2 $1 $1
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
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“Generically, profits are driven by the company’s asset base and by its efficiency working those assets”
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 assets
Financial Guidelines: Profitability. SGA/sales & Margins
17% 7 -
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).
IF: Contribution Margin is above 30%… but Net 30%… 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 &
IF: Net Margin above 20%, but ROS (net 20%, 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
Stock Price Profit$
STOCK PRICE Function of: 1. Earnings per Share n Net Profit / # Shares 2. Book Value n Equity / # Shares 3. Dividend Policy
M A R K E T I N G M G T. S I M U L A T I O N Which most often selected … but least preferable to do? Things you can do w/ your $$$: üPay off Debt üInvest in growth üBuy-back stock üPay dividends
M A R K E T I N G M G T. Reducing Leverage S I M U L A T I O N • Says to stockholders— “We can think of nothing better to do w/ $$ than save you interest payments” – More debt eliminated the greater target you become for a takeover. . • No reason not to maintain Co. Financial Structure that got you to position of high profitability…
M A N A G E M E N T S I M U L A T I O N What is the Relationship between My Strategy & Success Measures One more thing to think about
Diff Strategies Playointoity re ge/m ss equ vera bt/Measures Different Success le e s er l de gie h hig s/more y = sset ateg MSre a. SP & ROE Str. Profit mo ost ment/ C MC pf/e t s inve BCL X X ate more r St ate ve d er use op. ROA ha s & ROS Foc. AT d l vely sale ou pf/s shs/aecti pf/as s ff all le e r ove L=2 -3 All Segments= more sales & thus X X X r Niche & leve enable greater Cum. profit & overall r PLC owe l market share gy = B-Diff L=1. 5 -2 Niche. PLCDiff s s e/le ag Cost- X Strate s t n atio s asse i rent Xs X ffe / le Di nt X X e i m vest n X X X
n Select Success Measures & Determine Relative Weightings n Need to enter weightings – prior to round-1