accounting - further ratios
TRANSCRIPT
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Further Evaluation of Accounts
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Dr. Clive Vlieland-BoddyFCA FCCA MBA
2009
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Valuation of Businesses
Enterprise Value (EV)Net Asset Value.
Earnings Multiple ValuesDiscounted Net Present Value.EV/EBITDA = payback
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Enterprise Value
Market Cap +Interest bearing debt
Cash or Cash Equivalents
This is sometimes called the takeover value !
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Earnings Multiple
Often based on an adjusted P/E ratio or astandard market ratio.
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Discounted NPV
Discounting the future expected cash flows topresent value.
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Remember
Valuation is one thing.But the real issue is to find a price that buyer and seller agree.
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Linking Ratios
These are essentially expanding the itemsexamined but essentially the basis equationstill exists.
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Dupont Analysis
Analysis of Return onStockholders Equity
(ROE)
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The Dupont Equation[Return on Equity (ROE)]
Equity NI
ROE
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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.
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The Dupont Equation[Return on Equity (ROE)]
)()()( leverage X efficiency X ity profitabil ROE
Equity Assets X
AssetsSales X
Sales NI ROE
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The Dupont Equation[Return on Equity (ROE)]
)()()( leverage X efficiency X ity profitabil ROE
Equity Assets X
AssetsSales X
Sales NI ROE
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The Dupont Equation[Return on Equity (ROE)]
)()()( leverage X efficiency X ity profitabil ROE
Equity NI
Equity Assets X
AssetsSales X
Sales NI ROE
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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Good Readings
See 17.1.11
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Environmental Scanning
TOOLS ANDMETHODS
SWOTOther ToolsPESTEL
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SWOT
The CompanyStrengths
WeaknessesThe Environment
Opportunities
Threats
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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.
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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.
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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.
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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.
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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.
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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).
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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
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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.
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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.
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PEST or PEST(EL)
Environmental ScanningPolitical Issues
Economic IssuesSocial IssuesTechnical Issues
Environmental IssuesLegal Issues
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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
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Development Scenarios MainSteps
Identificationof RegionalDrivers and
RegionalIssues
Assessmentof RegionalDrivers andDependency
Analysis
Elaborationof
DependencyMatrix
DevelopmentScenario 1
DevelopmentScenario 2
DevelopmentScenario 3
DevelopmentScenario 4
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Market Value Added
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Earnings Value Added
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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.
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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
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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.
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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.
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Coffee Break
17.2.1
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Coffee Break
17.5.1
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Competitive Analysisand Marketing Strategy:A Review
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Structural Analysis of IndustriesMichael Porter
RIVALRY AMONGCOMPETITORS
THREAT OFSUBSTITUTES
THREAT OF NEW ENTRANTS
BARGAININGPOWER OF
BUYERS
BARGAININGPOWER OFSUPPLIERS
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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
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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
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Barriers and Profitability
Low, stable returns
High, stable returns High, risky returns
Low, risky returns
ENTRYBARRIERS
EXIT BARRIERS
Low
High
Low High
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The End
to be continued..