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 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?

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

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

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

Du Pont Formula x x net profit equity Return on Equity = net profit Value Chain net profit equity Return on Equity = net profit sales sales assets assets equity x x

Du Pont Formula x Return on Equity = net profit equity sales assets Value Chain Return on Equity = net profit equity sales assets x

Ratio World Class   Top 10 cut Mean Poor  ROE* 600%+ 100%+ ~20% <15%

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

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

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).

IF: 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).

7-17%

Net Margin above 20%, but ROS (net profit) below 5%.. -- 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).

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

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

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

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

Assets/Equity – simulation takes owner's perspective. LEVERAGE: Assets/Equity – simulation takes owner's perspective. Corp assets fin.w/ debt Optimal Leverage     Assets Debt Equity 1.0   $1 $0 2.0 $2 3.0 $3 4.0 $4 A Leverage of 3.0 says, "For every $3 of Assets there is $1 of Equity 1.8 to 2.8

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…

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

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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+

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

Stock Price Profit$

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

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