FOUNDATION BUSINESS SIMULATION Success Measures
Dec 24, 2015
FOUNDATION BUSINESS SIMULATION
Success Measures
Success Measures
Profits Market Share ROS Asset Turnover ROA ROE Stock Price Market Capitalization
Select 3 – 4 that you want to focus on
A financial ratio shows the relationship between two financial measures
Developed by dividing one measure into another Provide insights into company’s operations and
strategy Four categories: liquidity, solvency, market
value, profitability Used internally to evaluate performance and set
goals Used externally to make investment decisions
Introduction to Ratios• ROS• Asset Turnover• ROA• ROE
Ratio Information
ROS – Return on SalesNet profit divided by total sales for the same period.
ROA – Return on AssetsNet profit divided by the value of the total assets for the same period.
ROE – Return on EquityNet profit divided by the value of the owners’ equity for the same period.
LeverageTotal assets divided by owners’ equity.
TurnoverSales divided by the value of total assets for the same period.
- Information such as on the front page of FastTrack report
Ratios Report Sample from Spreadsheet Proformas
•Your spreadsheet program creates a Proforma Ratios Report based on your sales forecasts and tactical decisions.
Are your decisions maximizing the Success Measurements (ROE, ROS, ROA, Stock Price, Asset Turnover, Leverage. Market Capitalization) you chose?
Return on Assets
Return on Assets =Return on Assets =net profitnet profit
assetsassets
““ROA measures a company’s ability to use ROA measures a company’s ability to use all its assets to generate earnings.”all its assets to generate earnings.”
Return on Assets
What Does Return On Assets Tell You? Return on assets is an efficiency ratio. It
compares the profits generated with the asset base required. It answers the question, how hard are you working your assets?
There is an economic opportunity cost notion associated with this ratio. An operating manager may be challenged with how a dollar spent on assets might do compared with a dollar invested in some other area, or how the ROA compares with the interest a firm is paying on the money borrowed to pay for the asset.
Return on Assets
Typical Range: This ratio is volatile especially in early
rounds. A typical ROA in early rounds would fall
around 6% By later rounds, ROA averages around 15% An ROA between 20% – 30% must be
considered excellent
““ROS indicates the percentage of each sales ROS indicates the percentage of each sales dollar that results in net income.”dollar that results in net income.”
Return on Sales
Return on Sales =Return on Sales =net profitnet profit
net salesnet sales
Return On Sales
What Does Return On Sales Tell You? Since return on sales (ROS) gives the analyst
an idea of the profit margin on a product, this ratio can reveal a great deal about product positioning and pricing policies.
All companies, whether cost leaders or differentiators, strive to keep their margins as high as possible.
A cost leader attacks expenses, particularly the cost of goods, in he hope of maintaining margins while dropping price.
A differentiator creates demand, then raises prices to cover the increased cost while maintaining margins.
Return On Sales ROS is also a good indicator of demand and
supply within the industry. The more competitive an industry, the more pressure there is on price and subsequently ROS falls.
Typical Range: ROS in early rounds typically ranges from
2% to 8% Margins in later rounds have a potential to
increase because teams have cut expenses and right-sized their production.
ROS typically ranges from 5% to 15%
Asset Turnover
““Reveals how effective assets are at Reveals how effective assets are at generating sales revenue.”generating sales revenue.”
Asset Turnover =Asset Turnover =salessales
assetsassets
Asset Turnover
What Does Asset Turnover Tell You? Asset turnover tells an analyst more about
volume of sales than it does about profitability. Asset turnover (T/O) demonstrates how effective the asset base is in generating top line revenue.
To increase Asset Turnover, a company must either:
1. Increase sales without increasing assets – for example increase awareness and easy accessibility
2. Hold sales constant while reducing assets – eliminate idle plant or excess working capital
Asset Turnover
Typical Range: In the beginning rounds, Asset
Turnover usually ranges between 0.8 and 1.2
By later rounds it averages around 1.5 An Asset Turnover of 2.0 means you
are doing well
Leverage
Leverage =Leverage =assetsassets
equityequity
““Leverage shows the debt level of the Leverage shows the debt level of the organization.”organization.”
Leverage The amount of debt used to finance a firm's assets.
A firm with significantly more debt than equity is considered to be highly leveraged.
The degree to which an investor or business is utilizing borrowed money. In itself, Leverage is not Good or Bad
If you were absolutely certain you could borrow at 10% and make a 20% return, you would borrow all you could.
The higher your leverage the higher the risk that you will not be able to make your interest and principal payments
On the other hand, use of Equity dilutes ownership and increases the risk of take-over
Leverage
Typical Range: Leverage typically ranges between
1/5 and 3.0 Below 1.5 you have used retained
earnings to fund growth instead of giving it to stockholders as dividends, and either avoided debt or reduced it
Above 3.0 your interest payments use much of your earnings
Return on Equity
Return on Equity =Return on Equity =net profitnet profit
equityequity
““Return on Equity highlights for the Return on Equity highlights for the stockholders the return on their investment.”stockholders the return on their investment.”
Return on Equity
What Does Return On Equity Tell You? Return on equity tells you how
effectively a company is using the dollars invested in it by stockholders.
According to Forbe's Magazine, ROE is the most often quoted single statistic when describing a firm's performance. It is also one of the statistics considered to be most useful by stockholders.
Return on Equity
Typical Range: ROE is relatively easy to manipulate
– issue stock, retire stock ROE between 10% - 15% could be
considered Fair ROE between 15% - 25% - Good ROE between 25% - 50% - Excellent ROE > 50% “Worthy of Close
Inspection”
Du Pont Formula
The following diagram shows how ROI was calculated when that ratio was first created back in the early 1900s.
As anyone can see, it is far more complex than many currently touted calculations.
What it also illustrates is that, originally, ROI was a measure of return on the total investment in the entire business, not the ROI of a project or a product or a training course or any other isolated aspect of a business.
Du Pont Formula
DU PONT'S FORMULA FOR ROE
Financial executives at Du Pont cooked up this formula for deriving ROE.
It provides a richer way of looking at corporate profitability.
• PROFIT MARGIN X TURNOVER X LEVERAGE = ROE Profits [divided by] Sales [divided by] Assets [divided by] Equity
Du Pont Formula
net profitnet profit
salessales
salessales
assetsassets
assetsassets
equityequityxxxx xxxx
Value Chain
Return on Return on SalesSales
Asset Asset TurnoverTurnover
LeverageLeverage
Du Pont Formula
net profitnet profit
salessales
salessales
assetsassets
assetsassets
equityequityxxxx xxxx
Return on Return on SalesSales
Asset Asset TurnoverTurnover
LeverageLeverage
Return on Equity =Return on Equity =net profitnet profit
equityequity