Accounting - Further Ratios

7/27/2019 Accounting - Further Ratios

1/62

1

Further Evaluation of Accounts


2/62

2

Dr. Clive Vlieland-BoddyFCA FCCA MBA

2009


3/62

3

Valuation of Businesses

Enterprise Value (EV)Net Asset Value.

Earnings Multiple ValuesDiscounted Net Present Value.EV/EBITDA = payback


4/62

4

Enterprise Value

Market Cap +Interest bearing debt

Cash or Cash Equivalents

This is sometimes called the takeover value !


5/62


6/62

6

Earnings Multiple

Often based on an adjusted P/E ratio or astandard market ratio.


7/62

7

Discounted NPV

Discounting the future expected cash flows topresent value.


8/62

8

Remember

Valuation is one thing.But the real issue is to find a price that buyer and seller agree.


9/62

9

Linking Ratios

These are essentially expanding the itemsexamined but essentially the basis equationstill exists.


10/62

10

Dupont Analysis

Analysis of Return onStockholders Equity

(ROE)


11/62

11

The Dupont Equation[Return on Equity (ROE)]

Equity NI

ROE


12/62

12

ROE just tells us the return!

This could be because of the:Profitability of the business.

The gearing of the business so that theEquity Shareholders are benefiting or otherwise from changes in debt financing.Or could be from better or worse use of theNCA.

Du Pont expands the basic Formula.


13/62

13


)()()( leverage X efficiency X ity profitabil ROE

Equity Assets X

AssetsSales X

Sales NI ROE


14/62

14



Equity Assets X

AssetsSales X

Sales NI ROE


15/62

15



Equity NI

Equity Assets X

AssetsSales X

Sales NI ROE


16/62

16

Betas = systematic risk

These are placed on enterprises by themarket place. They normally range from 0-21 is standard.0 means that the company is not affected bythe general movement of the market.2 means that the company is moves moresharply than the market.They can act as a general guide to the entity.


17/62

17

Failure Prediction Models

These are useful tools to know about. Theybasically look at the liquidity of a companyand create something called a z score.

Altmans which is the most well known isworth knowing.

At www.creditguru.com is an insolvency

predictor which does the calculation for you.


18/62

18

Altmans Z Score Z Score = 1.2 A + 1.4 B + 3.3 C + 0.6 D + 1.0 Ewhen:

A = working capital/total assetsB = retained earnings/total assetsC = EBIT/total assetsD = market value of equity/book value of debtE = sales/ total assets

A score of 2.7 or more represents a strongcompany. A score of less than 1.8 indicateshigh risk of failure.


19/62


20/62

20

Sustainable Growth

Financing Growth is essential. This can bedone by several ways:Improving Cash Management.Improving Assets Utilisation.Increasing Leverage.

Retained Earnings.Increasing Share Capital.


21/62

21

Sustainable Growth Cont

Most companies fund growth by not payingall the net profit out as dividends. Thus theretained earnings fund the growth. Butoften this is insufficient.Some can fund the growth by effectiveworking capital management. Lidl and Aldi.

Generally additional capital, debt or equity isoften required.


22/62

22

Sustainable Growth Cont..

Pay Out Ratio ( dividend Ratio) is the % or net profit that is distributed as dividends.Plough Back Ratio is the % that is retained.Some say that the Plough Back Ratio is thesustainable growth rate. But this is notaltogether fair.


23/62

23

Sustainable Growth

Whilst this formula shows the internallygenerate profits will assist with growth, thereare clearly other areas to achieve sustainablegrowth:Improving working capital management. (Aldi& Lidl)

Access to debt and capital markets togenerate funds on a regular basis.


24/62

24

Good Readings

See 17.1.11


25/62


26/62


27/62

27

Environmental Scanning

TOOLS ANDMETHODS

SWOTOther ToolsPESTEL


28/62

28

SWOT

The CompanyStrengths

WeaknessesThe Environment

Opportunities

Threats


29/62

29

SWOT analysis

Popular method used for summarising of theinnovation analysis results;

Provides an overview of regional strengthsand weaknesses as well as opportunities andthreats the region is currently facing or may

face in the future.


30/62

30

Internal factors

A STRENGTH is a is a resource or capacityof the region that it can take advantage of toimprove its innovation system andcompetitiveness, e.g.

Access to well-educated labour force;Good communication and infrastructure;Diversified regional economic structure;Well-functioning public services;Etc.


31/62

31

Internal factors

WEAKNESS is a limitation, fault or defect inthe region that will keep it from improving the

innovation system, e.g.Limited number of start ups in the region;Peripheral location and low population density;

High degree of long-term unemployment;Lack of cooperation between companies;Etc.


32/62

32

External factors

OPPORTUNITY is a favourable situation inthe region's environment, e.g.

Availability of EU funds and programmes;New markets through increasedinternationalisation;

New educational opportunities;Cross-border cooperation;Global increase for demand in tourism services;Etc.


33/62

33

External factors

THREAT is an unfavourable situation in theregion's environment that may potentially

damage the strategy, e.g.Increasing of energy prices ;Termination of regional development funding;

Decrease of population;Emigration of high-qualified labour force;Etc.


34/62

34

SWOT Design

One SWOT strategy for the whole region; or

A set of SWOT strategies Relevant if different views of the parties involvedin the SWOT process;E.g. a regional economic strength may beregarded as a weakness from environmentalpoint of view;May be structured along different sectors(economic, environmental, social, etc) or targetgroups (companies, public agencies, R&Dsector, etc).


35/62

35

SWOT Analysis Main Steps

SWOT Matrix

Strenghts

123

Weaknesses

123

Opportunities123

Threats123

OS ActionsOxSxOxSxOxSx

OW ActionsOxWx

OxWx

OxWx

TS ActionsTxSxTxSxTxSx

TW ActionsTxWxTxWxTxWx

Scaning of Regional

Environment

Analysis of Strenghts

andWeaknesss

Analysis of Opportunities

andThreats


36/62

36

Using SWOT as a Basis for Development Strategy

The strategy shall define priorities and actionsthat

1. Build on STRENGTHS;

2. Eliminate WEAKNESSES;

3. Exploit OPPORTUNITIES;

4. Mitigate the effect of THREATS.


37/62

37

SWOT Golden Rules

Be realistic about the strengths andweakness of your region when conducting

the SWOT; Avoid general SWOT! It should always bespecific;

Distinguish between where your region istoday and where it could be in the future;

Keep your SWOT short and simple.


38/62

38

PEST or PEST(EL)

Environmental ScanningPolitical Issues

Economic IssuesSocial IssuesTechnical Issues

Environmental IssuesLegal Issues


39/62

39

Development Scenarios

An alternative to SWOT analysis

Development scenarios are not predictions or

forecasts of the future!They intend to explore a number of wide-ranging possible futures and access their

implications for the region and its main actors


40/62

40

Development Scenarios MainSteps

Identificationof RegionalDrivers and

RegionalIssues

Assessmentof RegionalDrivers andDependency

Analysis

Elaborationof

DependencyMatrix

DevelopmentScenario 1





41/62

41

Market Value Added


42/62


43/62


44/62

44

Earnings Value Added


45/62

45

EVA

Economic Value Added (EVA) is likeMVA, but applied on an annual basis.

EVA = Operating profit - (Totalcapital x Cost of capital).EVA represents economic profit, as

opposed to accounting profit.


46/62


47/62

47

Relationship of EVA to MVA

MVA is the NPV of the EVAs EVA EVA EVA EVAYear 1 Year 2 Year 3 .... Year n

MarketValueMarketvalue

MVA

Capital

=EVA + EVA + EVA + ... + EVA1 + r (1 + r) 2 (1 + r) 3 (1 + r) n

Market value is based on establishing theeconomic investment made in the company(capital), making a best guess about whateconomic profits (EVA) will happen in thefuture, and discounting those EVAs to thepresent to get market value added.

MVA


48/62


49/62

49

MM Theory: Zero Taxes

Modligliani and Miller (MM) prove, under a veryrestrictive set of assumptions, that a firms value isunaffected by its financing mix:

VL = VU.Therefore, capital structure is irrelevant.

Any increase in ROE resulting from financialleverage is exactly offset by the increase in risk (i.e.,r s), so WACC is constant.


50/62


51/62

51

Dividend Policy

There is an agreement that companiesshould not pay dividends as they should beable to generate a return far in excess of thatan ordinary shareholder could do with themoney.This argument that capital gains will

accelerate faster with no dividend policy is anargument supported by many.In reality, shareholders need cash flow.


52/62

52

Coffee Break

17.2.1


53/62

53

Coffee Break

17.5.1


54/62

54

Competitive Analysisand Marketing Strategy:A Review


55/62

55

Structural Analysis of IndustriesMichael Porter

RIVALRY AMONGCOMPETITORS

THREAT OFSUBSTITUTES

THREAT OF NEW ENTRANTS

BARGAININGPOWER OF

BUYERS

BARGAININGPOWER OFSUPPLIERS


56/62


57/62

57

Factors Affecting Rivalry AmongExisting Competitors

Numerous or Equally Balanced CompetitorsSlow Industry GrowthHigh Fixed or Storage Costs

Need to operate at capacity . Price cutting Lack of DifferentiationCapacity Augmented in Large IncrementsDiverse CompetitorsHigh Strategic StakesHigh Exit Barriers

B i i P f B i


58/62

58

Bargaining Power of Buyers isHigh When....

Purchasing is concentrated or is in large volumesrelative to sellers sales The product represents a large proportion of buyerscostsThere is little differentiation or there are lowswitching costsBackward integration is a credible threat

Product performance / quality is unimportant tobuyers performance


59/62


60/62

60

Barriers and Profitability

Low, stable returns

High, stable returns High, risky returns

Low, risky returns

ENTRYBARRIERS

EXIT BARRIERS

Low

High

Low High


61/62


62/62

The End

to be continued..

Documents

Accounting - Further Ratios