UNLOCKING THE MAGIC OF NUMBERS UNLOCKING THE MAGIC OF NUMBERS DR. GEORGE WEBSTER EXECUTIVE EDUCATION...
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Transcript of UNLOCKING THE MAGIC OF NUMBERS UNLOCKING THE MAGIC OF NUMBERS DR. GEORGE WEBSTER EXECUTIVE EDUCATION...
UNLOCKINGUNLOCKINGTHETHE
MAGIC OF NUMBERSMAGIC OF NUMBERS
DR. GEORGE WEBSTER EXECUTIVE EDUCATION
FOOD MARKETING ST. JOSEPH’S UNIVERSITY
3 85 YX
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VALUE CREATIONVALUE CREATION IN IN
THE FOOD INDUSTRYTHE FOOD INDUSTRY
•What is value creation?
•What are the drivers of value creation ?
•How do we measure value creation?
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WHAT IS VALUE CREATION?WHAT IS VALUE CREATION?
• Process
• Involves decision making– Financing
– Investing
– Operating
• Includes all stakeholders
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““THE SCORECARDS”THE SCORECARDS”
• BALANCE SHEET - a statement of position at a point in time– Shows what we own and what we owe
– Of particular interest to the CFO
• INCOME STATEMENT - a statement of value creation over time– Measures how well we operated
– Of particular interest to the CEO
• CASH FLOW STATEMENT - puts operations on a cash basis– Gives sources and uses of cash
– Of particular interest to the COO
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BALANCE SHEET- FACSIMILE COMPANY DECEMBER 31, 19XX
ASSETS LIABILITIES & O.E.CURRENT ASSETS CURRENT LIABILITIES Cash 3000 Accts. Payable 2000 Accts. Rec. 2000 Wages Payable 1000 Inventory 8000 13000 Rent 1000 4000
LONG TERM LONG TERM P & E 25000 Long Term Debt 7000 Other 4000 OWNER’S EQUITYTOTAL 29000 Common Stock 5000 Ret. Earnings 26000 TOTAL 31000
TOTAL ASSETS 42000 TOTAL LIAB. & OE 42000
INCOME STATEMENT- FASCIMILE CO.FOR THE YEAR ENDED 12/31/XX
NET SALES 55000
LESS: COST OF GOODS 35000
GROSS MARGIN 20000
LESS: OPERATING EXPENSES
Salaries 5000
Rent Expense 1000
S.,G., & A. 4000 10000
OPERATING PROFIT 10000
LESS: INCOME TAX (.40) 4000
NET INCOME AFTER TAX 6000
STATEMENT OF CASH FLOWS-FASCIMILE CO.
FOR THE YEAR ENDED 12/31/XX
•CASH FROM OPERATIONS
Net Income 2000
Depreciation 500 2500
•CASH FROM INVESTING ACTIVITIES
Capital Expenditures 5000
Acquisitions 15000 (20000)
•CASH FROM FINANCING ACTIVITIES
Issuance of Long Term Debt 700
Sale of Common Stock 11500
Cash Dividends 400 11800
•NET CHANGE IN CASH (5700)
8
HOW WE MEASURE VALUE HOW WE MEASURE VALUE CREATIONCREATION
• ROI - Return on investment
• ROE - Return on equity
• EPS - Earnings per share
• EVA - Economic value added
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WHAT ARE THE DRIVERS OF WHAT ARE THE DRIVERS OF VALUE?VALUE?
• EFFECTIVENESS - How much revenue do we generate from the assets we have?
• EFFICIENCY - How well do we use the assets we own?
• LEVERAGE - How much debt do we have in the capital structure?
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EFFECTIVENESSEFFECTIVENESS
EFFECTIVENESS =Total SalesTotal Assets
A&P - 1998 Effectiveness is 3.43
A&P - 1996 Effectiveness is 3.50
A&P -1998 $10,262,199,000$$2,995,253,000=
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EFFICIENCYEFFICIENCY
EFFICIENCY =Net IncomeTotal Sales
A&P - 1998 Efficiency is .0062
A&P - 1996 Efficiency is .0057
A&P 1998 = $63,586,000$10,262,199,000
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LEVERAGELEVERAGE
LEVERAGE = Total AssetsOwner’s Equity
A&P - 1998 Leverage is 3.23
A&P - 1996 Leverage is 3.50
A&P -1998 =$2,995,253,000 $926,632,000
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RETURN ON EQUITYRETURN ON EQUITY
RETURN ON EQUITY = Net IncomeOwner’s Equity
(Effectiveness) X (Efficiency) X (Leverage)
Total Assets
Owner’s Equity
Sales
Total AssetsX
Net Income
SalesX
A&P 1998 ROE = $63,586,000 / $926,632,000 = .069
= 3.43 X .0067 X 3.23 = .069
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RETURN ON INVESTMENTRETURN ON INVESTMENT
RETURN ON INVESTMENT = Net IncomeTotal Assets
ROI =Net Income
SalesX
Sales
Total Assets
ROI = Net Margin X Asset Turnover
A&P 1998 ROI = .0062 X 3.42 = .02
A&P 1996 ROI = .0057 X 3.50 = .02
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THE F-I-O MODELTHE F-I-O MODEL
• FINANCING - the process of obtaining capital for the business
• INVESTING - the process of asset acquisition to operate the business
• OPERATING - using resources to maximize shareholder wealth
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(Effectiveness) X (Efficiency) X (Leverage)
HOW WE MEASURE VALUE HOW WE MEASURE VALUE CREATIONCREATION
Total Assets
Owner’s Equity
Sales
Total AssetsX
Net Income
SalesX
Investing Operating Financing
FIO MODELFIO MODEL
(Asset Turnover) X (Net Margin) X (Degree Financial Leverage)
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EARNINGS PER SHAREEARNINGS PER SHARE
EARNINGS PER SHARE =Earnings
Shares of Common Stock Outstanding
A&P 1998 EPS = $1.66
A&P 1996 EPS = $1.50
•Market Measure
•Unambiguous
•Represents per Share Value Creation
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OPERATING PROFIT (EBIT)
EBIT = OPERATING PROFIT/ SALES
EBIT measures operating profitability including depreciation
Average for cohort group = 6.4%
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EBIT - A&P
EBIT = $144,215,000/ $10,262,199,000 = .01
BEST PRACTICE FOR COHORT GROUP IS ALBERTSONS ;
EBIT = .083
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EBITDA
EBITDA = Operating Profit before Depreciation/ Net Sales
EBITDA measures operating profitability excluding depreciation.
Industry average = 4.87%
Average for cohort group = 4.5%
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EBITDA FOR A&P
EBITDA = 378,451,000/ 10,262,199,000 = .037
BEST PRACTICE FOR COHORT GROUP IS ALBERTSONS ;
EBITDA = =.061
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NET MARGIN
NET MARGIN = NET INCOME/ SALES
Net Profit Margin measures the portion of the firm’s sales dollar remaining after it pays all expenses
Industry average = 1.22%
Average of cohort group = 2.3%
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NET MARGIN- A&P
NET MARGIN = $63,042,000/$10,262,199,000 = .62%
BEST PRACTICE FOR COHORT GROUP IS
ALBERTSONS
NET MARGIN = 3.52%
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RETURN ON TOTAL ASSETS
RETURN ON TOTAL ASSETS = NET INCOME TOTAL ASSETS
MEASURES THE ABILITY OF A COMPANY’S COMBINED EQUITY CAPITAL AND DEBT SECURITIES TO GENERATE PROFITS
Industry average = 3.64%
Average of cohort group = 7.1%
.
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RETURN ON ASSETS- A&P
RETURN ON ASSETS = $63,042,000/$2,973,679,245 = .0212
BEST PRACTICE FOR COHORT GROUP IS
ALBERTSONS
RETURN ON ASSETS = .099
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RETURN ON EQUITY
RETURN ON EQUITY = NET INCOME/ OWNER’S EQUITY
RELATES COMPANY EARNINGS SPECIFICALLY TO THE RESOURCES PROVIDED BY ITS OWNERS
Industry average = 16.03%
Average of cohort group = 29.7% (with Kroger)
Average of cohort group = 22.5% (w/o Kroger)
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RETURN ON EQUITY- A&P
RETURN ON EQUITY = $63,042,000/ $926,632,000 = 6.9%
BEST PRACTICE FOR COHORT GROUP IS
AHOLD
RETURN ON EQUITY = 30.22%
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ASSET TURNOVER
ASSET TURNOVER = NET SALES/TOTAL ASSETS
ASSET TURNOVER IS USED TO MEASURE THE FIRM’S ABILITY TO USE ITS ASSETS TO GENERATE SALES
Industry average = 2.98 TIMES
Average of cohort group = 3.05 TIMES
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ASSET TURNOVER - A&P
ASSET TURNOVER =$10,262,199,000 /$2,973,679,245 = 3.42
BEST PRACTICE FOR COHORT GROUP IS;
KROGER
ASSET TURNOVER = 4.38
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DEBT TO EQUITY
DEBT TO EQUITY = TOTAL LIABILITIES/ TOTAL EQUITY
THE DEBT-TO-EQUITY RATIO INDICATES THE DEGREE OF DEPENDENCE ON CREDITORS, RATHER THAN OWNERS, IN PROVIDING FUNDS TO OPERATE THE BUSINESS.
Industry average = 3.17 TIMES
Average of cohort group = 3.16 TIMES
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DEBT TO EQUITY - A&P
DEBT TO EQUITY = $ 2,068,620,000/ $926,632,000 = 2.23
BEST PRACTICE FOR COHORT GROUP IS;
ALBERTSONS
DEBT TO EQUITY = 1.16
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CURRENT RATIO
CURRENT RATIO = CURRENT ASSETS/ CURRENT LIABILITIES
CURRENT RATIO INDICATES THE ABILITY OF A COMPANY TO MEET ITS CURRENT OBLIGATIONS
Industry average = 1.05
Average of cohort group = .96
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CURRENT RATIO - A&P
CURRENT RATIO = $1,217,000,000/ $955,130,000 = 1.27
BEST PRACTICE FOR COHORT GROUP IS;
FOOD LION
CURRENT RATIO = 1.40
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QUICK RATIO
QUICK RATIO = (CURRENT ASSETS - INVENTORY) CURRENT LIABILITIES
QUICK RATIO MEASURES THE RELATIONSHIP BETWEEN CASH, CURRENT RECEIVABLES,AND MARKETABLE SECURITIES TO CURRENT LIABILITIES. IT INDICATES A COMPANY’S ABILITY TO DISCHARGE ITS CURRENT OBLIGATIONS WITHOUT THE NEED TO SELL OFF INVENTORIES.
Industry average = .32
Average of cohort group = .28
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QUICK RATIO - A&P
QUICK RATIO = ($1,217,227,000 - $882,229,000)/ $$955,130,000 = .31
BEST PRACTICE FOR COHORT GROUP IS;
PUBLIX SUPERMARKETS
QUICK RATIO = .66
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GROSS MARGIN RETURN ON INVENTORY (GMROI)
GMROI COMBINES BOTH GROSS MARGIN PERCENT AND INVENTORY TURNS INTO ONE NUMBER.
Industry average = 466%
Average of cohort group = 360%
GMROI = GROSS MARGIN/ AVERAGE INVENTORY
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GMROI - A&P
GMROI = $3,169,070,000/ $882,229,000 = 223%
BEST PRACTICE FOR COHORT GROUP IS;
SAFEWAY
GMROI = 426%
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CASH CONVERSION CYCLE
CASH CONVERSION CYCLE = INVENTORY CONVERSION PERIOD + RECEIVABLES COLLECTION PERIOD - PAYABLES DEFERRAL PERIOD.
THE CASH CONVERSION CYCLE THUS EQUALS THE LENGTH OF TIME THE FIRM HAS FUNDS TIED UP IN ITS CURRENT ASSETS.
Average of cohort group = 10 days
Assumes a 30 day payables deferral period.
Cash conversion cycle - A&P = 32 days
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ACTIVITY/PERFORMANCE/ACTIVITY/PERFORMANCE/LEVERAGE MEASURESLEVERAGE MEASURES
Retailer Producer Distributor
ACTIVITY
Inventory Turnover 10.61 5.32 14.2
Receivables Turnover 100.3 12.24 27.21
Total Asset Turnover 3.05 1.21 3.99
PERFORMANCE
Net Margin (%) 1.22 10.76 1.47
Return on Assets (%) 3.64 13.13 4.91
Return on Equity (%) 29.7 38.40 14.06
LEVERAGE
Total Assets/ Equity 4.16 3.09 3.39
40
ECONOMIC VALUE ADDEDECONOMIC VALUE ADDED
•Measures real profitably- on a cash basis
•Measures the cost of equity- not shown on balance sheets
•Cost of equity is its opportunity cost- what the investors
could do in their next best alternative
•Capital includes long term debt, preferred stock, and common stock
•Cost of capital is its weighted average
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ECONOMIC VALUE ADDEDECONOMIC VALUE ADDED
ECONOMIC VALUE ADDED =[Net Operating Profit After Tax - After Tax Dollar Cost of
Capital]
Net Operating Profit After Tax = Operating Profit - Income Tax
Cost of Capital = Weighted After Tax Cost of Capital
Capital = Total Capital Employed = Common and Preferred Stock + Long Term Debt
After Tax Dollar Cost of Capital= Cost of Capital (%) X Capital
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ECONOMIC VALUE ADDEDA&P - 1998
NET INCOME AFTER TAX = $63,586,000
LESS: COST OF CAPITAL - $111,196,000
EQUALS: ECONOMIC VALUE ADDED ($47,610,000)