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The Intelligence Collaborative
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How Five Financial Ratios
Predict a Competitor’s
Business Sustainability
A Complimentary Webinar from Aurora WDC
12:00 Noon Eastern /// Wednesday 30 March 2016
~ featuring ~
Mark Johnson Derek Johnson
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Mark Johnson
Mark Johnson has been engaged in Competitive Intelligence for nearly 20 years in a variety of
industries and roles. Mark has a Bachelors and Masters in Economics from Southern Illinois
University at Edwardsville, and is ABD in Economics from Saint Louis University. He began working in
Competitive Intelligence with SBC Communications, and has also worked in Software, Consumer
Services, Energy, Industrial Equipment, and Medical Devices. Mark currently works for Essilor
America, the largest maker of prescription lenses in the world, and also conducts custom CI research
with his consultancy Vector Group Services. In 2014, Mark developed and delivered an online
Graduate level course in Competitive Intelligence at the University of North Texas. Mark was the
chairman of the Dallas SCIP Chapter for several years.
Email: mark@vector-group.com
The Intelligence Collaborative is the online learning and networking community powered by Aurora WDC,
our clients, partners and other friends and dedicated to exploring how to apply intelligence methods to
solve real-world business problems.
Apply for a free 30-day trial membership at http://IntelCollab.com or learn more about Aurora at
http://AuroraWDC.com. See you next time!
The Intelligence Collaborative
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Questions, Commentary & Content
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The Intelligence Collaborative
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Learning Objectives
►Using financial peer comparisons and trend indicators
►Understand how a small, core set of financial ratios should
help you analyze a company’s ability to remain a going
concern
►Look at some special financial analysis situations, such as
venture/start-up competitors, private competitors (or
divisions of larger enterprises)
►Advanced concepts like war chests and burn rates
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Financial Reporting
► Simplest, most accessible, most comprehensive source of business
facts about a target
► Generally available / Under-used
► Perhaps stale, but difficult for a company to impact financial results
► Reliable, audited, enforced
► Potential manipulation / misreporting
► Unbiased view to the success of the business plan
► GAAP / IFRS
► EDGAR
► http://www.privco.com (private company financial intel)
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Strategic Uses
►General Profiling
►General Health of the Company
►Qualifying Partners, Acquisitions, Due Diligence
►Strategy Qualification
►Scenario Evaluation
►Answering a specific question or a KIT
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Key Financial Statements
►US Financial Reporting
► EDGAR - http://www.sec.gov/edgar/searchedgar/companysearch.html
► Tables also available through Yahoo Finance, Google Finance, or your own
broker
►Quarterly 10Q / Annual 10K
►Income Statement
►Balance Sheet
►Cash Flow Statement
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Key Financial Concepts
► Profitability
► Operating Margin: Operating Income / Net Sales
► Leverage or Debt Load
► Debt to Equity: Total Debt / Total Equity (whether your operation is debt funded or equity funded)
► Total Debt / LT Debt (vulnerability to interest rates)
► Liquidity (these are often reported separately)
► Current Ratio: Current Assets / Current Liabilities
► Quick Ratio: (Current Assets – Inventories – Prepayments)/Current Liabilities
► Activity or Efficiency
► Asset Turnover: Net Sales / Total Assets
► Inventory Turnover: Sales / Inventory
► Bankruptcy Predictors
► Cash Flow / Total Debt (ability to pay off or service debt)
► Net Working Capital / Total Assets (NWC = Current Assets – Current Liabilities)
► Altman Z-Score – a single formula with 5 ratio components
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Why This Works
PROFIT
CASH /
LIQUIDITY DEBT EFFICIENCY
Business Tradeoffs
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Comparisons Provide Context
►Raw numbers – no context
►Ratios better, but vary by industry
►Against a peer group, can refine to Better / Worse
►Combine with trends
► Improving
► Deteriorating
►Benchmark by identifying similar firms in distress
►Flagging a timeline with key events
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Case Study
►Let’s compare WalMart to Kohl’s, Sears, JC Penney, and
Target.
►All public, so no problem.
►Sears designation is Sears Holdings, with most of the
Holdings referring to Store Operations, including KMart.
►Jan16 not in for most of the companies, so let’s use Ann
2014, reported in Jan 2015.
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Pull our Ratios
Financial data taken from Google Finance
FINANCIAL RATIO
DESIRED
MEASURE
OPERATING MARGIN 5.6% -4.8% 8.9% -2.8% 6.2%
TOT DEBT / LT DEBT 1.23 1.22 1.71 1.02 1.01
CURRENT ASSETS / CURRENT LIABILITIES 0.97 0.96 1.99 2.01 1.16
NET SALES / TOTAL ASSETS 2.39 2.36 1.32 1.19 1.76
CASH FLOW / TOTAL DEBT 0.04 (0.20) 0.09 (0.04) 0.12
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Determine Best & Worst
Financial data taken from Google Finance
FINANCIAL RATIO
DESIRED
MEASURE
OPERATING MARGIN 5.6% -4.8% 8.9% -2.8% 6.2%
TOT DEBT / LT DEBT 1.23 1.22 1.71 1.02 1.01
CURRENT ASSETS / CURRENT LIABILITIES 0.97 0.96 1.99 2.01 1.16
NET SALES / TOTAL ASSETS 2.39 2.36 1.32 1.19 1.76
CASH FLOW / TOTAL DEBT 0.04 (0.20) 0.09 (0.04) 0.12
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Evaluate Our Ratios
Financial data taken from Google Finance
FINANCIAL RATIO
DESIRED
MEASURE
OPERATING MARGIN 5.6% -4.8% 8.9% -2.8% 6.2%
TOT DEBT / LT DEBT 1.23 1.22 1.71 1.02 1.01
CURRENT ASSETS / CURRENT LIABILITIES 0.97 0.96 1.99 2.01 1.16
NET SALES / TOTAL ASSETS 2.39 2.36 1.32 1.19 1.76
CASH FLOW / TOTAL DEBT 0.04 (0.20) 0.09 (0.04) 0.12
BEST 1 0 1 1 2
WORST 0 3 1 1 0
AVG
PERCENTILE:
50.0% 25.0% 55.0% 45.0% 75.0%
POINTS 15 20 14 16 10
RANK 3 5 2 4 1
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Impact on Strategy
► Operating Margin – Operating Income / Net Sales
► High margin companies can afford to cut prices. Low margin companies can’t follow price
cuts without increase in blood loss. (relative pain)
► Leverage – Total Debt / LT Debt
► Higher values mean higher Short Term Debt, and greater vulnerability to interest rates.
► Liquidity – Current Assets / Current Liabilities (Current Ratio)
► Higher values mean daily operations are generating funds adequately.
► Efficiency – Net Sales / Total Assets
► Higher efficiency measures indicate good management of company assets.
► Bankruptcy – Operating Cash Flow / Total Debts
► Higher measure means the company is generating enough cash to pay debts without
adversely affecting daily operations. Lower values imply jeopardy in credit markets.
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An Alternate Approach (Altman’s Z-Score)
► Weighted 5 Ratios
► Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
► Where:
► A = Working Capital/Total Assets
► B = Retained Earnings/Total Assets
► C = Earnings Before Interest & Tax/Total Assets
► D = Market Value of Equity/Total Liabilities
► E = Sales/Total Assets
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Altman’s Z-score
Financial data taken from Google Finance
Z-Score lower than 1.8 strongly implies a risk of bankruptcy within a year.
Scores higher than 3.6 have no risk of bankruptcy.
Z-SCORE CALCULATIONS COEFFICIENT
Working Capital/Total Assets 1.20 (0.01) (0.02) 0.20 0.21 0.05
Retained Earnings/Total Assets 1.40 0.42 (0.16) 0.83 (0.17) 0.23
Earnings Before Interest & Tax/Total Assets 3.30 0.13 (0.11) 0.12 (0.03) 0.11
Market Value of Equity/Total Liabilities 0.60 0.40 (0.07) 0.42 0.19 0.34
Sales/Total Assets 1.00 2.39 2.36 1.32 1.19 1.76
ALTMAN Z-SCORE 3.65 1.69 3.36 1.20 2.71
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Have Things Improved for Sears
Financial data taken from Google Finance
MEASURE 15Q1 15Q2 15Q3 TREND
OPERATING MARGIN -3.0% 1.6% -6.6%
TOTAL DEBT / LT DEBT 1.36 1.02 1.25
CURRENT RATIO 1.00 1.38 1.11
NET SALES / TOT ASSETS 45.0% 47.1% 44.3%
CASH FLOW / TOT DEBT 0.01 0.50 0.02
SEARS QUARTERLY TREND
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Special Situations
►Venture Funding / Startups – still published, but different
► Typically Equity funded for a percentage of the company.
►Private Companies or a Division within a Company
► Answer: Chapter 9 of Fuld’s The New Competitor Intelligence.
► Estimate the Income Statement or Balance Sheet from other sources.
►Some financials are manipulated and/or misreported.
► Relatively rare, but Ratios can often help flag companies with strange
reporting. The “pure fiction” financial report is very rare.
► Further reading: Financial Shenanigans: How to Detect Accounting
Gimmicks & Fraud in Financial Reports – by Howard Schilit
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Advanced Topics
► War Chest
► Money laid aside for a particular project or campaign
► Cash and Short Term Investments
► Can include some debt if debt load isn’t too high
► Burn Rate
► Key measure for Venture Capital funded startups
► Negative cash flow of $X per month
► Can only burn so low before additional funding is sought
► Remedies include seeking additional equity funding, selling off non-core assets,
reducing staff, exploring debt
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Thank you!
Now how about a little Q&A?
Email: mark@vector-group.com
Website: http://www.vector-group.com
The Intelligence Collaborative is the online learning and networking community powered by Aurora WDC,
our clients, partners and other friends and dedicated to exploring how to apply intelligence methods to
solve real-world business problems.
Apply for a free 30-day trial membership at http://IntelCollab.com or learn more about Aurora at
http://AuroraWDC.com. See you next time!

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How Five Financial Ratios Predict a Competitor's Business Sustainability

  • 1. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by How Five Financial Ratios Predict a Competitor’s Business Sustainability A Complimentary Webinar from Aurora WDC 12:00 Noon Eastern /// Wednesday 30 March 2016 ~ featuring ~ Mark Johnson Derek Johnson
  • 2. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Mark Johnson Mark Johnson has been engaged in Competitive Intelligence for nearly 20 years in a variety of industries and roles. Mark has a Bachelors and Masters in Economics from Southern Illinois University at Edwardsville, and is ABD in Economics from Saint Louis University. He began working in Competitive Intelligence with SBC Communications, and has also worked in Software, Consumer Services, Energy, Industrial Equipment, and Medical Devices. Mark currently works for Essilor America, the largest maker of prescription lenses in the world, and also conducts custom CI research with his consultancy Vector Group Services. In 2014, Mark developed and delivered an online Graduate level course in Competitive Intelligence at the University of North Texas. Mark was the chairman of the Dallas SCIP Chapter for several years. Email: mark@vector-group.com The Intelligence Collaborative is the online learning and networking community powered by Aurora WDC, our clients, partners and other friends and dedicated to exploring how to apply intelligence methods to solve real-world business problems. Apply for a free 30-day trial membership at http://IntelCollab.com or learn more about Aurora at http://AuroraWDC.com. See you next time!
  • 3. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by α Use the Questions pane on your GoToWebinar control panel and all questions will be answered in the second half of the hour. α You are welcome to tweet any comments on Twitter where we are monitoring the hashtag #IntelCollab or eavesdrop via http://tweetchat.com/room/IntelCollab α Slides will be available after the webinar for embedding and sharing via http://slideshare.net/IntelCollab α To view the recording and download the PPT file, please register for a trial membership at http://IntelCollab.com. Questions, Commentary & Content
  • 5. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Learning Objectives ►Using financial peer comparisons and trend indicators ►Understand how a small, core set of financial ratios should help you analyze a company’s ability to remain a going concern ►Look at some special financial analysis situations, such as venture/start-up competitors, private competitors (or divisions of larger enterprises) ►Advanced concepts like war chests and burn rates
  • 6. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Financial Reporting ► Simplest, most accessible, most comprehensive source of business facts about a target ► Generally available / Under-used ► Perhaps stale, but difficult for a company to impact financial results ► Reliable, audited, enforced ► Potential manipulation / misreporting ► Unbiased view to the success of the business plan ► GAAP / IFRS ► EDGAR ► http://www.privco.com (private company financial intel)
  • 7. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Strategic Uses ►General Profiling ►General Health of the Company ►Qualifying Partners, Acquisitions, Due Diligence ►Strategy Qualification ►Scenario Evaluation ►Answering a specific question or a KIT
  • 8. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Key Financial Statements ►US Financial Reporting ► EDGAR - http://www.sec.gov/edgar/searchedgar/companysearch.html ► Tables also available through Yahoo Finance, Google Finance, or your own broker ►Quarterly 10Q / Annual 10K ►Income Statement ►Balance Sheet ►Cash Flow Statement
  • 9. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Key Financial Concepts ► Profitability ► Operating Margin: Operating Income / Net Sales ► Leverage or Debt Load ► Debt to Equity: Total Debt / Total Equity (whether your operation is debt funded or equity funded) ► Total Debt / LT Debt (vulnerability to interest rates) ► Liquidity (these are often reported separately) ► Current Ratio: Current Assets / Current Liabilities ► Quick Ratio: (Current Assets – Inventories – Prepayments)/Current Liabilities ► Activity or Efficiency ► Asset Turnover: Net Sales / Total Assets ► Inventory Turnover: Sales / Inventory ► Bankruptcy Predictors ► Cash Flow / Total Debt (ability to pay off or service debt) ► Net Working Capital / Total Assets (NWC = Current Assets – Current Liabilities) ► Altman Z-Score – a single formula with 5 ratio components
  • 10. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Why This Works PROFIT CASH / LIQUIDITY DEBT EFFICIENCY Business Tradeoffs
  • 11. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Comparisons Provide Context ►Raw numbers – no context ►Ratios better, but vary by industry ►Against a peer group, can refine to Better / Worse ►Combine with trends ► Improving ► Deteriorating ►Benchmark by identifying similar firms in distress ►Flagging a timeline with key events
  • 12. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Case Study ►Let’s compare WalMart to Kohl’s, Sears, JC Penney, and Target. ►All public, so no problem. ►Sears designation is Sears Holdings, with most of the Holdings referring to Store Operations, including KMart. ►Jan16 not in for most of the companies, so let’s use Ann 2014, reported in Jan 2015.
  • 13. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Pull our Ratios Financial data taken from Google Finance FINANCIAL RATIO DESIRED MEASURE OPERATING MARGIN 5.6% -4.8% 8.9% -2.8% 6.2% TOT DEBT / LT DEBT 1.23 1.22 1.71 1.02 1.01 CURRENT ASSETS / CURRENT LIABILITIES 0.97 0.96 1.99 2.01 1.16 NET SALES / TOTAL ASSETS 2.39 2.36 1.32 1.19 1.76 CASH FLOW / TOTAL DEBT 0.04 (0.20) 0.09 (0.04) 0.12
  • 14. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Determine Best & Worst Financial data taken from Google Finance FINANCIAL RATIO DESIRED MEASURE OPERATING MARGIN 5.6% -4.8% 8.9% -2.8% 6.2% TOT DEBT / LT DEBT 1.23 1.22 1.71 1.02 1.01 CURRENT ASSETS / CURRENT LIABILITIES 0.97 0.96 1.99 2.01 1.16 NET SALES / TOTAL ASSETS 2.39 2.36 1.32 1.19 1.76 CASH FLOW / TOTAL DEBT 0.04 (0.20) 0.09 (0.04) 0.12
  • 15. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Evaluate Our Ratios Financial data taken from Google Finance FINANCIAL RATIO DESIRED MEASURE OPERATING MARGIN 5.6% -4.8% 8.9% -2.8% 6.2% TOT DEBT / LT DEBT 1.23 1.22 1.71 1.02 1.01 CURRENT ASSETS / CURRENT LIABILITIES 0.97 0.96 1.99 2.01 1.16 NET SALES / TOTAL ASSETS 2.39 2.36 1.32 1.19 1.76 CASH FLOW / TOTAL DEBT 0.04 (0.20) 0.09 (0.04) 0.12 BEST 1 0 1 1 2 WORST 0 3 1 1 0 AVG PERCENTILE: 50.0% 25.0% 55.0% 45.0% 75.0% POINTS 15 20 14 16 10 RANK 3 5 2 4 1
  • 16. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Impact on Strategy ► Operating Margin – Operating Income / Net Sales ► High margin companies can afford to cut prices. Low margin companies can’t follow price cuts without increase in blood loss. (relative pain) ► Leverage – Total Debt / LT Debt ► Higher values mean higher Short Term Debt, and greater vulnerability to interest rates. ► Liquidity – Current Assets / Current Liabilities (Current Ratio) ► Higher values mean daily operations are generating funds adequately. ► Efficiency – Net Sales / Total Assets ► Higher efficiency measures indicate good management of company assets. ► Bankruptcy – Operating Cash Flow / Total Debts ► Higher measure means the company is generating enough cash to pay debts without adversely affecting daily operations. Lower values imply jeopardy in credit markets.
  • 17. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by An Alternate Approach (Altman’s Z-Score) ► Weighted 5 Ratios ► Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E ► Where: ► A = Working Capital/Total Assets ► B = Retained Earnings/Total Assets ► C = Earnings Before Interest & Tax/Total Assets ► D = Market Value of Equity/Total Liabilities ► E = Sales/Total Assets
  • 18. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Altman’s Z-score Financial data taken from Google Finance Z-Score lower than 1.8 strongly implies a risk of bankruptcy within a year. Scores higher than 3.6 have no risk of bankruptcy. Z-SCORE CALCULATIONS COEFFICIENT Working Capital/Total Assets 1.20 (0.01) (0.02) 0.20 0.21 0.05 Retained Earnings/Total Assets 1.40 0.42 (0.16) 0.83 (0.17) 0.23 Earnings Before Interest & Tax/Total Assets 3.30 0.13 (0.11) 0.12 (0.03) 0.11 Market Value of Equity/Total Liabilities 0.60 0.40 (0.07) 0.42 0.19 0.34 Sales/Total Assets 1.00 2.39 2.36 1.32 1.19 1.76 ALTMAN Z-SCORE 3.65 1.69 3.36 1.20 2.71
  • 19. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Have Things Improved for Sears Financial data taken from Google Finance MEASURE 15Q1 15Q2 15Q3 TREND OPERATING MARGIN -3.0% 1.6% -6.6% TOTAL DEBT / LT DEBT 1.36 1.02 1.25 CURRENT RATIO 1.00 1.38 1.11 NET SALES / TOT ASSETS 45.0% 47.1% 44.3% CASH FLOW / TOT DEBT 0.01 0.50 0.02 SEARS QUARTERLY TREND
  • 20. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Special Situations ►Venture Funding / Startups – still published, but different ► Typically Equity funded for a percentage of the company. ►Private Companies or a Division within a Company ► Answer: Chapter 9 of Fuld’s The New Competitor Intelligence. ► Estimate the Income Statement or Balance Sheet from other sources. ►Some financials are manipulated and/or misreported. ► Relatively rare, but Ratios can often help flag companies with strange reporting. The “pure fiction” financial report is very rare. ► Further reading: Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports – by Howard Schilit
  • 21. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Advanced Topics ► War Chest ► Money laid aside for a particular project or campaign ► Cash and Short Term Investments ► Can include some debt if debt load isn’t too high ► Burn Rate ► Key measure for Venture Capital funded startups ► Negative cash flow of $X per month ► Can only burn so low before additional funding is sought ► Remedies include seeking additional equity funding, selling off non-core assets, reducing staff, exploring debt
  • 22. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Thank you! Now how about a little Q&A? Email: mark@vector-group.com Website: http://www.vector-group.com The Intelligence Collaborative is the online learning and networking community powered by Aurora WDC, our clients, partners and other friends and dedicated to exploring how to apply intelligence methods to solve real-world business problems. Apply for a free 30-day trial membership at http://IntelCollab.com or learn more about Aurora at http://AuroraWDC.com. See you next time!

Notas do Editor

  1. For today’s webinar we’re going to try to attack this list of objectives. There are literally hundreds of different ratios. We try to simplify the process. We also look at some special situations like Venture funding, private company analysis, War Chests, and Burn Rates. So let’s get started. We have a lot of ground to cover.
  2. Financial reporting is generally available in the US, and in most industrialized countries. I believe your first stop when doing a profile is to check the company’s financials. But the resource is under-used. Partly this is due to the fact that not all CI professionals are proficient with Finance. If you’re uneasy, or if your management is skeptical, don’t be afraid to collaborate with someone from Finance, who might be able to help and to bolster credibility. Sometimes the information may seem a bit stale, but financial data is generally extremely accurate, and audited once a year. Financial data opens a highly detailed and unbiased view of a company’s business plan. Frequently, there is detail on operations by individual product group or geographic area. Besides, not that many sources in CI are subject to audit. The data is also kept very close to an apples-apples basis, with Generally Accepted Accounting Principles, and is unified with the International Financial Reporting Standards. In the US you can download financial results over a broad range of time for free from Edgar or other sources. For this presentation, I primarily used Google Financials.
  3. Like all CI sources, what you gather depends heavily on the question. Obviously, you can write a general profile of a company with financial data, or look at general health. You can qualify partners or acquisitions. You can look at specific strategies or scenarios, or answer a specific KIT. The key is being able to interpret the results.
  4. The key financial statements are fairly standard around the world. In the US, data is gathered and distributed by the Securities and Exchange Commission. Data is typically reported quarterly via a 10-Q report. Once a year, data is reported via the 10-K. The key reports are the Income Statement, Balance Sheet, and Cash Flow Statement.
  5. There are many separate lines on the three tables we just mentioned. The reason financial results aren’t used more extensively is that many non-financial professionals are bewildered by all of that detail. The numbers themselves don’t really help. I could tell you that a company made $2Billion in revenue last year and you wouldn’t know that much. Only a company’s gross size is revealed. Much more can be learned by using financial ratios, which put numbers in perspective. I’ve included some representative ratios for each major category here. You can get a good representative view of a company’s business with only a handful of measures. Profitability, Debt Load, Liquidity (more companies go bankrupt over liquidity issues than any other category.), Activity or Efficiency, and last of all, ratios that predict Bankruptcy.
  6. This process works because these categories form the core range of tools management uses. But when several measures go bad at the same time, a company is backed into a corner. A shortage in cash can be covered with some debt. But when all measures go bad, a company will be painted into a corner, with no way to turn the company around.
  7. We begin by pulling the numbers in the various reports, then calculating the Ratios we decided to use. To provide context we compare our target firm against others in a peer-group comparison. We can also examine the trend in a variable to see if it is improving, remaining flat, or even deteriorating.
  8. For our example case study, we look at a peer group of department stores and discount stores. Walmart, Kohl’s, Sears, JC Penney, and Target. There are reports recently that Sears, Kohls, and JC Penney will closing stores. The most recent annual period is 2014, so we used that.
  9. First we pull the data and calculate our ratios for each company. Some measures the higher the value, the better. For some measures, the desired measure is lower. Either way, once we obtain the ratios, we evaluate the best and worst measure in each row.
  10. The cells above have been flagged with a Green Check Mark if the value calculate is the highest in the peer group. The cells are flagged with a Red X if they are the worst among all the peers. NOTE: Two of these ratios are available on Yahoo Finance (under KEY STATISTICS), and still more are available from MSN Money.
  11. We then tally the measures to determine a valid ranking of companies from Good to Bad. We do this by first counting the number of BEST and WORST designations for each peer. We sum all 5 Percentile ranks for each Peer. Percentiles are more sensitive because they give a company credit for being 2nd, 3rd or 4th in the category. Lastly, we simply sum the ranks. If a company is ranked 1st, they get 1 point, if they are 2nd, they get 2 points, etc. Then we rank the average percentile and the number of points. The company with the lowest total is 1st. This ranking shows that Sears and JC Penney are in jeopardy for bankruptcy, with Sears being the worst by far.
  12. Some of the measures we are using will have important strategy implications. It’s fairly unusual to have a competitor flirting with bankruptcy, especially if the overall economy is fairly strong. The company with larger margins has pricing flexibility. A company with lower margins might be looking to increase average prices. They could also increase their margins by moving towards higher ticket merchandise. This is sometimes difficult if the company’s stores are viewed by the public as more budget friendly. If a competitor has a higher ratio of Total Debt to Long Term debt they will be vulnerable when interest rates rise. For Efficiency, we are looking at how much the company has invested (Total Assets) in order to achieve a certain level of sales. JCPenney is the worst on this measure, and corrective action would either mean generating more sales or finding a way to trim Assets…perhaps by tighter inventory control, or by closing low-performing stores. It may also be helpful to take the BEST and WORST measures in this analysis as Strengths and Weaknesses in a SWOT analysis.
  13. Note that both Sears and JCPenney are below the 1.8 Bankruptcy risk red-line. One reason the other table approach is preferable is that it gives you clues to which parts of the business are in trouble, or which areas are stronger.
  14. While at Metasolv, sales became worried about a particular competitor and wanted a quick profile on them because they had just gotten a fresh round of funding. I found that there was fresh funding, but it was structured as Debt rather than Equity, and was funded by a consortium rather than single venture company. The Venture firm also brought in a new high-profile CEO. I also found the competitor had been heavily discounting their sales, and were having difficulty generating revenue. I could have written the profile optimistically with the new funding, but I thought the CEO had been brought in to restructure and/or push through needed cuts. Within a week of issuing the profile that the company was not sustainable, they announced 75% layoffs effective immediately.
  15. When a company has a large cash reserve, there is often concern that the company may be building up a War Chest to fund a large acquisition. It is helpful to check recent trends to see if that reserve has been growing. When I worked at Flowserve, a Swiss competitor was observed to have a large cash reserve. Management was concerned, so we dug into the issue to see if we could determine what they would do. We noted that the old CEO would be retiring in 6-9 months, and there was a named successor. We also found that the cash reserve had been there for a couple of years, without growing or shrinking. We estimated an acquisition would be unlikely in the near term, because the CEO wouldn’t launch an initiative and let the successor live with the results. We structured our answer in percentage terms, with the largest probability that the company was NOT planning a big move. Burn Rate is very important in Venture Funded Startups, because the push is to get the company profitable enough to go public or to be acquired. This is how the Venture firm gets paid. However, it is also an important concept for established companies with negative cash flow, negative margins, or negative debt coverage. These situations can’t go on for long without damaging a company’s survivability. Last point: There are literally hundreds of different financial ratios to choose from, and to fine-tune the diagnosis. With and without inventories, etc. They are very much worth your time to dig into and try.