Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

How Five Financial Ratios Predict a Competitor's Business Sustainability

1,326 views

Published on

How Five Financial Ratios Predict a Competitor's Business Sustainability

Published in: Business
  • Be the first to comment

How Five Financial Ratios Predict a Competitor's Business Sustainability

  1. 1. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by How Five Financial Ratios Predict a Competitor’s Business Sustainability A Complimentary Webinar from Aurora WDC 12:00 Noon Eastern /// Wednesday 30 March 2016 ~ featuring ~ Mark Johnson Derek Johnson
  2. 2. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Mark Johnson Mark Johnson has been engaged in Competitive Intelligence for nearly 20 years in a variety of industries and roles. Mark has a Bachelors and Masters in Economics from Southern Illinois University at Edwardsville, and is ABD in Economics from Saint Louis University. He began working in Competitive Intelligence with SBC Communications, and has also worked in Software, Consumer Services, Energy, Industrial Equipment, and Medical Devices. Mark currently works for Essilor America, the largest maker of prescription lenses in the world, and also conducts custom CI research with his consultancy Vector Group Services. In 2014, Mark developed and delivered an online Graduate level course in Competitive Intelligence at the University of North Texas. Mark was the chairman of the Dallas SCIP Chapter for several years. Email: mark@vector-group.com The Intelligence Collaborative is the online learning and networking community powered by Aurora WDC, our clients, partners and other friends and dedicated to exploring how to apply intelligence methods to solve real-world business problems. Apply for a free 30-day trial membership at http://IntelCollab.com or learn more about Aurora at http://AuroraWDC.com. See you next time!
  3. 3. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by α Use the Questions pane on your GoToWebinar control panel and all questions will be answered in the second half of the hour. α You are welcome to tweet any comments on Twitter where we are monitoring the hashtag #IntelCollab or eavesdrop via http://tweetchat.com/room/IntelCollab α Slides will be available after the webinar for embedding and sharing via http://slideshare.net/IntelCollab α To view the recording and download the PPT file, please register for a trial membership at http://IntelCollab.com. Questions, Commentary & Content
  4. 4. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by
  5. 5. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Learning Objectives ►Using financial peer comparisons and trend indicators ►Understand how a small, core set of financial ratios should help you analyze a company’s ability to remain a going concern ►Look at some special financial analysis situations, such as venture/start-up competitors, private competitors (or divisions of larger enterprises) ►Advanced concepts like war chests and burn rates
  6. 6. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Financial Reporting ► Simplest, most accessible, most comprehensive source of business facts about a target ► Generally available / Under-used ► Perhaps stale, but difficult for a company to impact financial results ► Reliable, audited, enforced ► Potential manipulation / misreporting ► Unbiased view to the success of the business plan ► GAAP / IFRS ► EDGAR ► http://www.privco.com (private company financial intel)
  7. 7. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Strategic Uses ►General Profiling ►General Health of the Company ►Qualifying Partners, Acquisitions, Due Diligence ►Strategy Qualification ►Scenario Evaluation ►Answering a specific question or a KIT
  8. 8. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Key Financial Statements ►US Financial Reporting ► EDGAR - http://www.sec.gov/edgar/searchedgar/companysearch.html ► Tables also available through Yahoo Finance, Google Finance, or your own broker ►Quarterly 10Q / Annual 10K ►Income Statement ►Balance Sheet ►Cash Flow Statement
  9. 9. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Key Financial Concepts ► Profitability ► Operating Margin: Operating Income / Net Sales ► Leverage or Debt Load ► Debt to Equity: Total Debt / Total Equity (whether your operation is debt funded or equity funded) ► Total Debt / LT Debt (vulnerability to interest rates) ► Liquidity (these are often reported separately) ► Current Ratio: Current Assets / Current Liabilities ► Quick Ratio: (Current Assets – Inventories – Prepayments)/Current Liabilities ► Activity or Efficiency ► Asset Turnover: Net Sales / Total Assets ► Inventory Turnover: Sales / Inventory ► Bankruptcy Predictors ► Cash Flow / Total Debt (ability to pay off or service debt) ► Net Working Capital / Total Assets (NWC = Current Assets – Current Liabilities) ► Altman Z-Score – a single formula with 5 ratio components
  10. 10. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Why This Works PROFIT CASH / LIQUIDITY DEBT EFFICIENCY Business Tradeoffs
  11. 11. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Comparisons Provide Context ►Raw numbers – no context ►Ratios better, but vary by industry ►Against a peer group, can refine to Better / Worse ►Combine with trends ► Improving ► Deteriorating ►Benchmark by identifying similar firms in distress ►Flagging a timeline with key events
  12. 12. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Case Study ►Let’s compare WalMart to Kohl’s, Sears, JC Penney, and Target. ►All public, so no problem. ►Sears designation is Sears Holdings, with most of the Holdings referring to Store Operations, including KMart. ►Jan16 not in for most of the companies, so let’s use Ann 2014, reported in Jan 2015.
  13. 13. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Pull our Ratios Financial data taken from Google Finance FINANCIAL RATIO DESIRED MEASURE OPERATING MARGIN 5.6% -4.8% 8.9% -2.8% 6.2% TOT DEBT / LT DEBT 1.23 1.22 1.71 1.02 1.01 CURRENT ASSETS / CURRENT LIABILITIES 0.97 0.96 1.99 2.01 1.16 NET SALES / TOTAL ASSETS 2.39 2.36 1.32 1.19 1.76 CASH FLOW / TOTAL DEBT 0.04 (0.20) 0.09 (0.04) 0.12
  14. 14. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Determine Best & Worst Financial data taken from Google Finance FINANCIAL RATIO DESIRED MEASURE OPERATING MARGIN 5.6% -4.8% 8.9% -2.8% 6.2% TOT DEBT / LT DEBT 1.23 1.22 1.71 1.02 1.01 CURRENT ASSETS / CURRENT LIABILITIES 0.97 0.96 1.99 2.01 1.16 NET SALES / TOTAL ASSETS 2.39 2.36 1.32 1.19 1.76 CASH FLOW / TOTAL DEBT 0.04 (0.20) 0.09 (0.04) 0.12
  15. 15. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Evaluate Our Ratios Financial data taken from Google Finance FINANCIAL RATIO DESIRED MEASURE OPERATING MARGIN 5.6% -4.8% 8.9% -2.8% 6.2% TOT DEBT / LT DEBT 1.23 1.22 1.71 1.02 1.01 CURRENT ASSETS / CURRENT LIABILITIES 0.97 0.96 1.99 2.01 1.16 NET SALES / TOTAL ASSETS 2.39 2.36 1.32 1.19 1.76 CASH FLOW / TOTAL DEBT 0.04 (0.20) 0.09 (0.04) 0.12 BEST 1 0 1 1 2 WORST 0 3 1 1 0 AVG PERCENTILE: 50.0% 25.0% 55.0% 45.0% 75.0% POINTS 15 20 14 16 10 RANK 3 5 2 4 1
  16. 16. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Impact on Strategy ► Operating Margin – Operating Income / Net Sales ► High margin companies can afford to cut prices. Low margin companies can’t follow price cuts without increase in blood loss. (relative pain) ► Leverage – Total Debt / LT Debt ► Higher values mean higher Short Term Debt, and greater vulnerability to interest rates. ► Liquidity – Current Assets / Current Liabilities (Current Ratio) ► Higher values mean daily operations are generating funds adequately. ► Efficiency – Net Sales / Total Assets ► Higher efficiency measures indicate good management of company assets. ► Bankruptcy – Operating Cash Flow / Total Debts ► Higher measure means the company is generating enough cash to pay debts without adversely affecting daily operations. Lower values imply jeopardy in credit markets.
  17. 17. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by An Alternate Approach (Altman’s Z-Score) ► Weighted 5 Ratios ► Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E ► Where: ► A = Working Capital/Total Assets ► B = Retained Earnings/Total Assets ► C = Earnings Before Interest & Tax/Total Assets ► D = Market Value of Equity/Total Liabilities ► E = Sales/Total Assets
  18. 18. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Altman’s Z-score Financial data taken from Google Finance Z-Score lower than 1.8 strongly implies a risk of bankruptcy within a year. Scores higher than 3.6 have no risk of bankruptcy. Z-SCORE CALCULATIONS COEFFICIENT Working Capital/Total Assets 1.20 (0.01) (0.02) 0.20 0.21 0.05 Retained Earnings/Total Assets 1.40 0.42 (0.16) 0.83 (0.17) 0.23 Earnings Before Interest & Tax/Total Assets 3.30 0.13 (0.11) 0.12 (0.03) 0.11 Market Value of Equity/Total Liabilities 0.60 0.40 (0.07) 0.42 0.19 0.34 Sales/Total Assets 1.00 2.39 2.36 1.32 1.19 1.76 ALTMAN Z-SCORE 3.65 1.69 3.36 1.20 2.71
  19. 19. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Have Things Improved for Sears Financial data taken from Google Finance MEASURE 15Q1 15Q2 15Q3 TREND OPERATING MARGIN -3.0% 1.6% -6.6% TOTAL DEBT / LT DEBT 1.36 1.02 1.25 CURRENT RATIO 1.00 1.38 1.11 NET SALES / TOT ASSETS 45.0% 47.1% 44.3% CASH FLOW / TOT DEBT 0.01 0.50 0.02 SEARS QUARTERLY TREND
  20. 20. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Special Situations ►Venture Funding / Startups – still published, but different ► Typically Equity funded for a percentage of the company. ►Private Companies or a Division within a Company ► Answer: Chapter 9 of Fuld’s The New Competitor Intelligence. ► Estimate the Income Statement or Balance Sheet from other sources. ►Some financials are manipulated and/or misreported. ► Relatively rare, but Ratios can often help flag companies with strange reporting. The “pure fiction” financial report is very rare. ► Further reading: Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports – by Howard Schilit
  21. 21. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Advanced Topics ► War Chest ► Money laid aside for a particular project or campaign ► Cash and Short Term Investments ► Can include some debt if debt load isn’t too high ► Burn Rate ► Key measure for Venture Capital funded startups ► Negative cash flow of $X per month ► Can only burn so low before additional funding is sought ► Remedies include seeking additional equity funding, selling off non-core assets, reducing staff, exploring debt
  22. 22. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Thank you! Now how about a little Q&A? Email: mark@vector-group.com Website: http://www.vector-group.com The Intelligence Collaborative is the online learning and networking community powered by Aurora WDC, our clients, partners and other friends and dedicated to exploring how to apply intelligence methods to solve real-world business problems. Apply for a free 30-day trial membership at http://IntelCollab.com or learn more about Aurora at http://AuroraWDC.com. See you next time!

×