Too Little Growth What to do with the profits? year P R (decimal) A FLM G* NI / Sales Sales / TA equity / TA 2006 7.9 1.00 1.48 2.40 28.2 2007 8.3 1.00 1.37 2.11 24.0 2008 8.4 1.00 1.42 1.88 22.4 2009 9.2 1.00 1.39 1.73 22.1 2010 10.0 1.00 1.30 1.68 21.8 What if Change P Change R Change A Change FLM Values 6.32 .632 .821 1.05 needed Decrease NI Increase Increase sales Reduce Increase dividends Decrease Assets leverage sales What is the average sales growth? 65.4 / 5 = 13.8% What To Do When Sustainable Growth Exceeds Actual Growth? Ask if the situation is temporary. If yes, build up cash. If no, ask if the phenomenon is industry-wide, or within the firm. If within the firm, look for new product lines, improvements, etc. What happens if you ignore the problem? Surplus of cash grows Attracts corporate raiders How do they work? Find a low priced firm with excess cash Could just be cash but also excess cash in pension funds Buy the company; take the cash; discard what is left. Return The Money To The Shareholders How would this happen?
Too Little Growth What to do with the profits? year P NI / Sales R (decimal) A Sales / TA FLM equity / TA G* 2006 7.9 1.00 1.48 2.40 28.2 2007 8.3 1.00 1.37 2.11 24.0 2008 8.4 1.00 1.42 1.88 22.4 2009 9.2 1.00 1.39 1.73 22.1 2010 10.0 1.00 1.30 1.68 21.8 What if Change P Change R Change A Change FLM Values needed 6.32 .632 .821 1.05 Decrease NI Increase sales Increase dividends Increase sales Decrease Assets Reduce leverage What is the average sales growth? 65.4 / 5 = 13.8% What To Do When Sustainable Growth Exceeds Actual Growth? Ask if the situation is temporary. If yes, build up cash. If no, ask if the phenomenon is industry-wide, or within the firm. If within the firm, look for new product lines, improvements, etc. What happens if you ignore the problem? Surplus of cash grows Attracts corporate raiders How do they work? Find a low priced firm with excess cash Could just be cash but also excess cash in pension funds Buy the company; take the cash; discard what is left. Return The Money To The Shareholders How would this happen?
bua108_higgins_ch04_managing_growth_study_guide_sol.docx