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Maximizing Company Profitability through Financial Health Analysis

Understand your company's financial health by analyzing key financial questions. Ensure profitability, liquidity, leverage, asset utilization, investor returns, bankruptcy risk, bond ratings, and investment levels. Evaluate profitability ratios, net profits, and return on equity. Discover methods to improve return on equity through asset management and leverage. Examine contribution and net margin ratios to address marketing, production, and pricing issues. Optimize asset turnover and leverage for increased profitability. Consider bond ratings, stock price factors, and dividend policy for financial strategy and objectives.

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Maximizing Company Profitability through Financial Health Analysis

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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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