S trategic B usiness
Analysis
Phase 2
Group 2
Chayl Barola
Diana Mae Gonzales
Jayra Nica Napuli
Mark Arthur Mantilla
Genesel Mercado
Jenith Tejada
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Agenda
Revisit
Financial
Ratios
1
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Investment
Performance
Measures
2
Key
Performance
Indicator
Balanced
Score
Card
3
4
Gap
Analysis
5
2
Industry
•
•
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An industry is a group of
companies that are related
based on their primary business
activities.
Because of this relatedness to
each other, competition exist.
Wellknown
Rivalry
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FINANCIAL RATIOS
•
F inancial ratios are created with the use of
numerical values taken from financial statements to
gain meaningful information about a company. The
numbers found on a company’s financial statements
– balance sheet, income statement, and cash flow
statement – are used to perform quantitative
analysis and assess a company’s liquidity, leverage,
growth, margins, profitability, rates of return,
valuation, and more.
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Main Purpose of Financial
Ratios
1.
2.
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T rack C ompany
P erformance
Make C omparative
judgements regarding
company performance
Different Financial Ratios
LIQUIDITY RATIOS
Liquidity ratios -are financial ratios that measure a company’s
ability to repay both short- and long-term obligations. Common
liquidity ratios include the following:
The current ratio measures a company’s ability to pay off short-term liabilities
with current assets:
Current ratio = Current assets / Current liabilities, if high it means enough
cash
The acid-test ratio measures a company’s ability to pay off short-term liabilities
with quick assets:
Acid-test ratio = Current assets – Inventories / Current liabilities, if high it
means faster cash conversion cycle
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LIQUIDITY RATIOS
The cash ratio measures a company’s ability to pay off short-term
liabilities with cash and cash equivalents:
Cash ratio = Cash and Cash equivalents / Current Liabilities, if high
it means greater amount of cash on hand while lower short-term liablity
The operating cash flow ratio is a measure of the number of times a
company can pay off current liabilities with the cash generated in a
given period:
Operating cash flow ratio = Operating cash flow / Current liabilities,
if high, it means higher cash generated than what is normally needed to
pay short-term liabilities.
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LEVERAGE RATIOS
Leverage ratios- measure the amount of capital that comes from debt.
In other words, leverage financial ratios are used to evaluate a company’s
debt levels. Common leverage ratios include the following:
The debt ratio measures the relative amount of a company’s assets that
are provided from debt:
Debt ratio = Total liabilities / Total assets, the higher the more risky
The debt to equity ratio calculates the weight of total debt and financial
liabilities against shareholders’ equity:
Debt to equity ratio = Total liabilities / Shareholder’s equity, the
higher the more risky
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LEVERAGE RATIOS
The interest coverage ratio shows how easily a company can
pay its interest expenses:
Interest coverage ratio = Operating income / Interest
expenses, the higher the healthier its finance
The debt service coverage ratio reveals how easily a
company can pay its debt obligations:
Debt service coverage ratio = Operating income / Total
debt service, means the higher the more reliable to settle
debt by operating income
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LEVERAGE RATIOS
Efficiency ratios, also known as activity financial ratios, are used to
measure how well a company is utilizing its assets and resources.
Common efficiency ratios include:
The asset turnover ratio measures a company’s ability to generate sales
from assets:
Asset turnover ratio = Net sales / Average total assets, if higher,
company is better performing
The inventory turnover ratio measures how many times a company’s
inventory is sold and replaced over a given period:
Inventory turnover ratio = Cost of goods sold / Average inventory,
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higher level indicates timely dispose of inventory
LEVERAGE RATIOS
The accounts receivable turnover ratio measures how many times a
company can turn receivables into cash over a given period:
Receivables turnover ratio = Net credit sales / Average accounts
receivable, the higher means the more efficient the company exercised
its collections
The days sales in inventory ratio measures the average number of days
that a company holds on to inventory before selling it to customers.
Days sales in inventory ratio = 365 days / Inventory turnover ratio,
the higher the more inefficient the company is disposing its inventory
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PROFITABILITY RATIOS
Profitability ratios measure a company’s ability to generate income
relative to revenue, balance sheet assets, operating costs, and equity.
Common profitability financial ratios include the following:
The gross margin ratio compares the gross profit of a company to its net
sales to show how much profit a company makes after paying its cost of
goods sold:
Gross margin ratio = Gross profit / Net sales, higher means efficiency
The operating margin ratio compares the operating income of a company
to its net sales to determine operating efficiency:
Operating margin ratio = Operating income / Net sales, if high it
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means higher revenue in each peso
PROFITABILITY RATIOS
The return on assets ratio measures how efficiently a company is using its assets
to generate profit:
Return on assets ratio = Net income / Total assets, if high it means more
productive to generate revenue out of its balance sheet
The return on equity ratio measures how efficiently a company is using its equity
to generate profit:
Return on equity ratio = Net income / Shareholder’s equity, if high it means
more productive to generate revenue out of its existing assets
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MARKET VALUE RATIOS
Market value ratios are used to evaluate the share price of a company’s stock.
Common market value ratios include the following:
The book value per share ratio calculates the per-share value of a company based
on the equity available to shareholders:
Book value per share ratio = (Shareholder’s equity – Preferred equity) / Total
common shares outstanding, the higher, the more healthier to the company
The dividend yield ratio measures the amount of dividends attributed to shareholders
relative to the market value per share:
Dividend yield ratio = Dividend per share / Share price, if high, the more
preferable to shareholders for they can be distributed by bigger amount of share
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MARKET VALUE RATIOS
The earnings per share ratio measures the amount of net
income earned for each share outstanding:
Earnings per share ratio = Net earnings / Total shares
outstanding, higher means more earnings gained every
share
The price-earnings ratio compares a company’s share price
to its earnings per share:
Price-earnings ratio = Share price / Earnings per share,
the higher, the more difficult to sell a company’s stock
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Investment P erformance Measure
- helps select good investment as it
provides ongoing information about how
our investment is doing.
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Methods:
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1. P ayback P eriod Method – the amount of
time an investment takes to recover the
full cost.
2. Average Annual Rate of Return – the
average annual amount of cash flow
generated over the life of an investment.
3. Net P resent Value – an investment
criterion that consists of discounting
future cash flows
4. Internal Rate of Return – allows you to
evaluate an investment by expressing as a
percentage
P ayback P eriod Method
 shorter paybacks mean more attractive investment
 Disadvantage: cash generated from the project after the
agreed maximum payback is not taken into account.
 Sometimes used as preliminary evaluation and then
supplemented with other methods due to its limitations.
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Average Annual Rate of
Return
 The higher the value of the average rate of
return, the greater the return on the investment.
Disadvantage: it does not take considerations of
the potential effect of compounding asset
earnings over many years.
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Return on Capital Employed
- measures how efficiently a company is using
its capital to generate profits
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E xample of Return on C apital E mployed
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Investment P erformance Measures
4 Methods of E valuating P rofitability of
Investment
1. P ayback P ayment (P B P )Method
2. Average Annual Rate of Return (AARR)
3. Net P resent V alue (NP V)
4. Internal Rate of Return (IRR)
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Net P resent Value
- an investment criterion consists of
discounting future cash flows
- bring the expected cash flows to the
present, discounting them at a given
rate
- express a measure of a project’s
profitability in absolute terms
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T he NP V is calculated according to the
following formula
Where:
IO is the original investment;
F1, are the cash flows in each period;
n, is the number of periods; and
k the discount rate
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Indication:
1. NP V > 0, updating the cashflows will generate profits
2. NPV=0, investment will not generate profits or losses
3. NPV< 0, investment project will generate losses
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How to C ompute NP V?
E xample:
An investor made an investment of $500 in property
and gets back $570 the next year. If the rate of return is
10% . C alculate the net present value.
Solution:
Given:
IO= $500
NPV= - $500+ $570/1+.10
k= 10%
= - $500 + $570/1.1
F1= $570
= - $500 + $518.18
n= 1
NPV = $18.18
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Internal Rate of Return
- a discount rate that makes the NPV
of all cash flows equal to zero in a
discounted cash flow analysis
- tool to evaluate an investment
- expressed as a percentage
- is the discount rate in the NPV
formula
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T o calculate, we take the NP V to z ero:
Indication:
1. Higher IRR- more desirable investment
2. Compare IRR with an opportunity cost (R)
IRR> R - investment makes economic sense
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E xample:
Suppose an Investor has the opportunity to invest
in a new company. At the same time, a financial entity
offer you a financial product with 4% interest.
In order to make the decision to invest in the new
company, it will have to calculate its IRR.
Once the calculation is made, the IRR obtained
amounts to 6.8%
Would the investor prefer to accept the offer of a financial product
with 40% interest?
Or would the investor choose to invest in the new company?
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T he main difference between the 2 methods is
the RE S UL T .
NP V
vs.
IRR
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1. NP V - gives result in absolute (net terms), in
monetary units
E x. E uros
- indicates the value of the
investment at present time.
2. IRR- gives us a relative measure, expressed
as a percentage
- indicate the rate at which the initial
investment will be recovered.
Return on Investment
- generally defined as the ratio of net profit
over the total cost of an investment
- measures how effective your investments
into your business are at generating
income.
- is a way to measure whether a business
decision is paying off
- help understand what’s working and not
working in business so you can make
changes
- ROI is not static
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H ow do you calculate ROI?
ROI- usually represented as a ratio or
percentage
- obtained by dividing the gain or
net benefits earned from the
investment by the cost of the
investment.
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Example: If you spend 1,000 dollars per month to
payper click (PPC) advertising and generate 2,000
dollars revenues directly for the campaign.
ROI=
=
=
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Net profit earned
Cost of investment
1000
1000
1
Multiply by 100 to find
the percentage.
1(100) = 100%
;Thus, for every dollar you spend on
PPC adds, you earn a dollar in return.
ROI and TIME
Example 2:
If you’re making $3,000 per month, but working
60 hours per week on your business. (240 hrs a month)
•
ROI= $3,000/240 hrs.
= $12.5
Thus, for every hour you’re working, you’re only earning
$12.5
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Knowing your returns on the
investment of your time, you can
make changes to your business
model that allows you to earn
greater revenue in less time.
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KPI
K ey P erformance Indicator
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K ey P erformance Indicator
KPI- is a measurable value that demonstrates
how effectively an individual or a company is
achieving its key objectives.These indicators
are commonly used in every business or
organization to measure the overall business
performance over time.
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E xamples of K P Is:
Sales KPIs
1.Number of New Contracts Signed Per Period
2. Dollar Value for New Contracts Signed Per Period
3. Number of Engaged Qualified Leads in Sales Funnel
4. Hours of Resources Spent on Sales Follow Up
5.Average Time for Conversion
6.Net Sales-Dollar or Percentage Growth
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F inancial K P Is
7. G rowth in Revenue
8.Net P rofit Margin
9.G ross P rofit Margin
10.Operational C ash F low
11. C urrent Accounts Receivables
12.Inventory T urnover
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C ustomer K P Is
13.Number of C ustomers Retained
14. P ercentage of Market S hare
15. Net P romotor S core
16. Average T icket/S upport Resolution T ime
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There is a saying that
says “WHAT GETS
MEASURED, GETS DONE”
-ANONYMOUS
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S MART states that clear, attainable,
strategic goals are the most effective
way to create concrete milestones and
metrics. S MART goals are the individual
steps of a well-considered strategy to
achieving larger objectives.
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T he B alanced S corecard
ROBERT KAPLAN AND DAVID NORTON
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B AL ANC E D S C ORE C ARD
T he balance scorecard is a strategic planning framework that
companies use to:
1. assign priority to their products, projects, and services;
2. communicate about their targets or goals; and
3. plan their routine activities.
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Financial
Perspective
Customer
Perspective
Vision and
Strategy
T he B alanced
S corecard
anchored with 4
P erspectives.
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Organization
Capacity
Perspective
Internal
Process
Perspective
F inancial P erspective
- it reflects the measurement on
organization’s success
financially
- key indicators: return on
investment, gross margin, net
profit and such.
- S teps taken: introducing new
products & services and cutting
down on the costs of doing
business
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C ustomer P erspective
- looking the organiz ation from
the viewpoint of the customers.
It monitors how the entity is
providing value to its customers.
- sample indicators: customer
satisfaction and customer
retention
- strategies to focus: improving
product quality, enhancing the
customer shopping experience
and such.
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Internal P rocess P erspective
- views organiz ational
performance through efficiency
of business process
- Indicators can be ordering
time, preparation time, or
machine set-up time
- company formulate strategies
that lead to the creation of new
and improved ways of meeting
the needs of customers.
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B usiness C apacity P erspective
- views organiz ational performance
through human capital.
- personnel are required to
demonstrate high performance in
leadership, the entity’s
culture,application of knowledge,
and skill sets.
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- organiz ation should use the latest
technology to automate activities
and ensure a smooth flow of
activities.
Financial
Perspective
Customer
Perspective
Vision and
Strategy
Organization
Capacity
Perspective
Internal
Process
Perspective
Balanced Scorecard Template
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How do you spot
what’s missing in
your business
strategy?
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Gap Analysis
• Is the Process of comparing your actual
business performance with your desired
performance to see what’s missing.
• It is a project management tool to help
you identify from point A to point B.
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Benefits of using Gap Analysis
• Brainstorming Strategies
• Identify weak points
• Measure actual resources
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T hank you!
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And
tables to
compare
data.
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1P
2P
3P
D OG S
150,000
160,000
350,000
C AT S
99,000
150,000
255,000
E L E P HANT
S
25,000
125,000
99,000
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