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What are some metrics that help us gauge our company health?
What do we do with excess liquidity that begins to build up from this point
forward?
DEFINITION
LEVERAGE
ASSETS/EQUITY
SALES TO
CURRENT
ASSETS
CONTRIBUTION
MARGIN
RETURN ON
SALES
ASSET
TURNOVER
TOO HIGH
TOO LOW
UNPRODUCTIVE
ASSETS
COSTLY & RISKY
FINANCING
LIQUIDITY
PROBLEMS
LOW RETURN ON
EQUITY
SALES/CA
STOCKOUTS OR
CASH OUTS
LOW ASSET
TURNOVER
1 VC/SALES
UNCOMPETITIVE
PRICING
NI/SALES
POOR QUALITY
CASH FLOW
PROBLEMS
CASH FLOW
COVERAGE
POOR RETURN
ON INVESTMENT
ABOVE OUT OF
RANGE
CA/CL
ROE
PLANT
UTILIZATION
SALES TO
INVENTORY
SALES TO CASH
PRODUCTION/CAPACIT
Y
STOCKOUTS OR
CASHOUTS
ABOVE OUT OF
RANGE
EMPLOYEE
TURNOVER
SALES/INVENTORY
SALES/CASH
SALES/ASSETS
RANGE
2.0 2.5
1.75-2.75
3 5x
30 50%
5% - 15%
1-1.75x
10%-20%
IDLE ASSETS
150%-175%
STOCKOUTS
CASH OUTS
8 - 12x
BIG AL!
READ ON
18-22x
TASK
Go to a page 3 of the Capstone Courier and copy and paste the entire page onto an Excel
worksheet. You can then use the data to quickly calculate each of the above measures (with
the exception of Capacity Utilization which is on page 4) for (this is important!) both your
company and your competitors.
MORE ON CASH
Note the last measure: the Ratio of Sales to Cash. The reciprocal of that would be
Cash/Sales. If the correct range of Sales to Cash is 18 22x this implies:
i.
ii.
iii.
iv.
7
6
5
4
3
2
1
In the world of business, firms with excess cash tend to either 1) acquire other firms or 2)
become acquisition targets (usually resulting in removal of the existing management team!).
Neither of those options is available in this situation. Thus, assuming the company has a
sufficient number of well positioned products (if not, go back to R&D!); companies with cash
in excess of 5.5% of Sales should consider the following management decisions, in order of
desirability.