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Ascertain Financial Health of Your Company

Ascertain Financial Health of Your Company. 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

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Ascertain Financial Health of Your Company

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  1. Ascertain Financial Health of Your Company

  2. 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?

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

  4. 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

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

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

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

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

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

  10. 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).

  11. 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).

  12. 7-17%

  13. 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).

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

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

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

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

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

  19. 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…

  20. Page 3

  21. 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+

  22. AAA/AA/A/BBB/… BB & beyond is Junk… B/CCC /CC/C/D = default The More Assets you have the better your Bond Ratings • As your debt-to-assets ratio increases… Your short term interest rate increases… • Foreach additional .5% increase in interest -Youdrop one category

  23. Stock Price Profit$

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

  25. Evaluate Your Company’sFinancial Situation & Formulate Financial Strategy & Set Objectives...

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