|Financial Metric:||BENCHMARK||Round 0 Value||Analysis & Evaluation:|
Profits, ROA, ROS...
Margins: Contribution & Net
Liquidity- Current & Acid Test Ratios; Days of Working Capital
Leverage - Assets/Equity
Altman Z ...
Are You Making Enough Profit?
Are your Profits commensurate with the growth of the Industry ....are your profits at/above expectations?
(Year 0= $4 million, Year 1= $6 million , 2= $8 million , 3= $10 million , 4= $12 million , 5= $16 million , 6= $21 million , =$27 million , 8= $35 million)
Profitability ratios & benchmarks vary by the industry being evaluated-- generally, the higher the ratio the better.
The criteria below are for Your Sensor Industry, and are based on results of past Capstone Competitions... at the end of 8 rounds...
Profit= $200M+ Cum. Profit= $500M+
Mean Poor ROA 100%+ 50%+ ~10% <10% ROS 60%+ 35%+ ~5% <4%
Are your MARGINS --at/above industry benchmarks?
Margin Objectives Contribution Margin above 30% SG&A Margin Between 7-17% Net Margin above 20%
Contribution Margin= (Sales - Variable Costs) / Sales
SG&A-to-Sales Margin= (Selling, General & Administrative Expenses) / (Sales)
Net Margin= Sales - (Variable Costs + Period Costs) / Sales
Do you have Enough Money....
--On hand to run/grow your company
--& proportionately sourced to satisfy your Lenders & Investors?
How Liquid is your Company? As measured by---Current Ratio, Quick Ratio & Working Capital...
LIQUIDITY= A measure of the extent to which a person or organization has cash to meet immediate and short-term obligations &/or assets that can be quickly converted to meet immediate and short-term obligations...
A Liquidity Ratio is mainly used to give an idea of your company's ability to pay back its short-term liabilities (debt & payables) with its short-term assets (cash, inventory, receivables). The higher the liquidity ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good signal...
Current Ratio = Current Assets / Current Liabilities
Current Assets = Cash + Inventory + Accounts Receivable
Current Liabilities = Accounts Payable + Current Debt.
A Current Ratio of 1.0 means Current Assets are entirely funded with Current Liabilities. Bankers and vendors hate to see your Current Ratio at <1.0 because if anything goes wrong, you cannot pay your bills, and this puts them in the awkward position of either giving you more money or letting you go bankrupt. As the Current Ratio rises towards 2.0 they become less worried.
~ If your Current Ratio is 2.0, for every $2 of Current Assets, you have $1 of Current Liabilities & $1 of Equity invested.
~ If your Current Ratio is 3.0, then for every $3 of Current Assets there is only $1 from Debt-holders & $2 from Investors... Ergo, the bigger the Current Ratio, the less the risk faced by Debt-holders.
--A good current ratio is between 2 and 2.5
Ratio Excellent Satisfactory Lagging Current 2-2.5
Quick Ratio or Acid-test Ratio = (Current Assets- Inventory) / Current Liabilities
... is a stringent test that indicates whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. The acid-test ratio is far more strenuous than the working capital ratio, primarily because the working capital ratio allows for the inclusion of inventory assets... Companies with ratios <1 cannot pay their current liabilities and should be looked at with extreme caution. Furthermore, if the acid-test ratio is much lower than the working capital ratio, it means current assets are highly dependent on inventory. Retail stores are examples of this type of business.
Working Capital = Current Assets – Current Liabilities
Days of Working Capital = Working Capital / (Sales/365) ....= the number of days you could operate before your Working Capital would be consumed. Your Days of Working Capital should fall between 30 days and 90 days
Is your financing ideally proportioned between Debt & Equity?
As measured by: Leverage= Assets/Equity
The Financial Structure of the firm is the relationship between Debt and Equity. The relationship is called "Leverage" because stockholders are matching their equity with debt to create a bigger company. Assets/Equity ... gets at the relationship from an owner's perspective. (Debt/Assets is favored by lenders, and Debt/Equity by Management.) Owners are creating Assets (the Company) by matching their Equity with Debt in some proportion.
A Leverage of 3.0 says, "For every $3 of Assets there is $1 of Equity."
Leverage Assets Debt Equity 1.0 $1 $0 $1 2.0 $2 $1 $1 3.0 $3 $2 $1 4.0 $4 $3 $1
How effectively are you utilizing your assets?
As measured by Asset Turnover (Sales/Assets)
Are you providing your investors with an Adequate Level of Return?
>$2 + Rnd#
>.5 * Rnd#
< .5 *Rnd#
>$40 + 5*Rnd#
>$30 + 5*Rnd#
<$30 + 5*Rnd#
Stock Price Change >$10.00 >$0.00 <$0
*World Class Top10 Measures (8th Round): Stock Price= $500+/share
Your Stock Price is a function of:
> EPS (Net Profit / # Shares)
> Book Value (Equity / # Shares)
> Your Dividend Policy
Return on Equity ROE Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
Estimate your Chances of Bankruptcy:
...as predicted by: Your Altman Z Score:
Measuring the Near Term Solvency of Your company:
-- The Altman Z-Score, published in 1968 by Edward Altman -The formula may be used to predict the probability that a firm will go into bankruptcy ..."In its initial test, the formula was found to be 72% accurate in predicting bankruptcy two years prior to the event.... In a series of subsequent tests covering three different time periods over the next 31 years ... the model was found to be approximately 80-90% accurate in predicting bankruptcy one year prior to the event..."
The Interpretation of Z Score:
Above 3.0 -The company is safe based on these financial figures only.
Between 2.7 and 2.99 - On Alert. This zone is an area where one should exercise caution.
Between 1.8 and 2.7 - Good chances of the company going bankrupt within 2 years ....
Below 1.80- Start sending out your resume---Probability of imminent financial catastrophe is very high.
Use the following Z-Score Insolvency Prediction Calculator (available at URL= http://www.creditguru.com/CalcAltZ.shtml) to assess your company overall financial health. The variables in Green are from your Income Statement & the variables in Brown are from your Balance Sheet (see page 3 Capstone Courier) ... Stock Price & #Shares for calculation of your Market Value of Equity- listed in Stock Market Summary- page 2 of Capstone Courier...
Z-Score Insolvency Prediction Calculator:
1. Earnings Before Interest&Taxes (EBIT)
2. Total Assets .........................
3. Net Sales ................................
4. Market Value of Equity =
(Current Stock Price X Total # Shares)
5. Total Liabilities .........................
6. Current Assets .........................
7. Current Liabilities .....................
8. Retained Earnings.....................
Evaluate your Bond Ratings....