Transcript Presentation Title

A Financial Management System
to Measure and Manage the
Value of Your Business
Goal
•
Observed Weaknesses of Privately Held
Agribusinesses
•
•
Ways to Overcome the Weaknesses
EVA Financial Management System to Focus on
Maximizing Shareholder Value and Motivating
Employees
Observed Strategic Weaknesses of
Privately Owned Agribusinesses
• Ownership Structure
• Breadth/Depth of Management Team
• Inadequate Strategic Business Plan
• Inadequate Financial Management Plan
• Need to develop a strategic plan and a framework to
measure and manage the value of your business
• Key to maximizing long-term shareholder wealth
Five Forces That Determine Industry
Profitability
POTENTIAL
ENTRANTS
INDUSTRY
COMPETITORS
SUPPLIERS
CUSTOMERS
Rivalry Amount
Existing Firms
SUBSTITUTES
Type of Competition Determines
Industry Returns
High
Rate of
Return
Low
Large,
economies of
scale
Small and
niche-focused
Market
Share
Comparison of Publicly Traded and
Privately Held Companies
Publicly
Traded
(“Big”)
Privately
Held
(“Small”)
Breadth/Depth
Of Management
Documented
Business Plan
Key managers
in all aspects of
the business
with a strong
leader:
operations,
sales,
marketing, and
finance
Strategic plan in
place to guide
management
and measure
results.
Strong overall
leader with
weaker
individual
managers. Rely
on outside
advisors.
Typically
operate on a
year-to-year or
season-toseason basis
Flexibility
Tendency to be
inflexible due to
organizational
structure and
public reporting
requirements.
Flexible, can
quickly adapt to
changes in the
marketplace.
Discipline
Shareholder and
analyst scrutiny
focuses mgmt. on
maximizing
shareholder value.
Stock market
creates discipline.
Managers not
focused on
maximizing
shareholder value.
Owners focused
on minimizing
taxes.
• Privately held, middle market companies fail to systematically
measure and manage the value of their businesses. LIQUIDITY
Focus on Maximizing Terminal Value
Cash Flows from a 10-yr. $1000 Bond at 10%
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
1
2
3
4
5
6
7
8
9
10
• 40% of total present value is recognized in the final year of the bond.
•Same relationship in exists in valuing a company.
Typical Accounting Measures
Income Statement
• Gross Profit Margin
• Operating Profit Margin
Balance Sheet
• Net Profit Margin
•
•
•
•
• Earnings per Share
• Debt to Equity
(EBIT/Sales)
Accounts Receivable Turnover
Inventory Turnover
Asset Turnover
Working Capital to Sales
Return on Capital Employed
Return on Assets
ROE = Profit Margin x Asset Turnover x Financial Leverage
Shortcomings of Accounting
Measures
•
Fragile association between accounting returns
and creation of shareholder wealth.
•
Improvements in accounting measures may
actual destroy shareholder value.
•
Wide array of performance measures creates
confusion and conflicts among managers.
Economic Value Added (EVA®)
• Residual income measure that subtracts the cost of
capital from the operating profits generated in the
business
• Accounts properly for all the ways in which corporate
value may be created or destroyed
• Only performance measure to tie directly to the
intrinsic market value of a company
EVA = [rate of return (r) – cost of capital (c*)] x Capital Employed
EVA = NOPAT – c* x Capital Employed
EVA = Operating Profits – a Capital Charge
EVA Basics
…one should as soon compute earnings without
a capital charge “as play tennis with the net
down.”
All EVA does is simply lift the net back up where it
belongs.
EVA Value Creation Strategies
EVA = ( r – c*) x Capital Employed
• Improve operating profits without tying up any
more capital.
• Increase capital only if return on investment more
than covers the charge for additional capital.
• Liquidate capital where the earnings lost are
more than offset by a savings on the capital
charge.
• Structure balance sheet in a way that lowers the
cost of capital.
EVA Example - 3 Ways to Add Value
BASE
CASE
NOPAT
Capital Employed
Return on Capital - r
Cost of Capital - c*
NOPAT
Cost of Capital
EVA
IMPROVE
ACHIEVE
OPERATING PROFITABLE RATIONALIZE
EFFICIENCY
GROWTH
BUSINESS
$250
$1,000
25.0%
15.0%
$300
$1,000
30.0%
15.0%
$450
$2,000
22.5%
15.0%
$250
$667
37.5%
15.0%
$250
$150
$100
$300
$150
$150
$450
$300
$150
$250
$100
$150
Each Adds Shareholder Value in a Different Way….Only
Performance Measure to Identify Each
EVA Example – Stop Destroying
Value
BASE
CASE
NEW
BUSINESS
OPPORTUNITY
NOPAT
Capital Employed
Return on Capital - r
Cost of Capital - c*
$50
$1,000
5.0%
15.0%
$180
$2,000
9.0%
15.0%
NOPAT
Cost of Capital
EVA
$50
$150
($100)
$180
$300
($120)
Turning off the spigot on unrewarding projects
is the last way to add value.
The EVA Valuation Formula
• Market Value Added (MVA) = Market Value – Capital
• MVA = Present Value of all Future EVA
• Market Value = Capital + Present Value of all Future
EVA
• r / c* > 1.0 company will be valued at a premium to
its economic book value (capital)
• r / c* < 1.0 then company will be valued at a
discount to its economic book value (capital)
Graphical Example of EVA and
Value Creation
r = 15% & c* = 15%
EVA = $0
Value = Capital
r = 25% & c* = 15%
EVA = $100
Value > Capital
Return on
Capital - r
r = 5% & c* = 15%
EVA = ($100)
Value < Capital
Capital
Employed
Cost of Capital c*
Key Benefits of EVA Framework
• Links strategic, operating, and financial planning
• Helps managers make better decisions
• Capital charge converts the balance sheet into
another line-item expense
• EVA = Sales – Operating Costs – Capital Costs
• Easy to communicate to all employees
• Performance expressed in a single profit
measure expressed in dollars
EVA IS THE MOST RELIABLE UNAMBIGUOUS CONTINUOUSIMPROVEMENT METRIC
Four Applications of EVA
• MEASUREMENT
• Most accurate measure of corporate performance
• Translates accounting profits to economic reality
• MANAGEMENT
• Four ways to increase value
• MOTIVATION
• Cause managers to think and act like owners
• “Bank” bonuses to insure sustainability and long-term
thinking
• MINDSET
• Transforms corporate culture
• Internal corporate governance
KENT GROUP INC.
Investment Bankers Specializing in the Agribusiness and Food Industries
18000 W. Sarah Lane, Suite 175
Brookfield, WI 53045-5886
Tele: 262-792-0440 Fax: 262-792-0445
www.kentgroupinc.com