Assessing Company Value

When individuals are interested in purchasing, investing or working with a company it may also be a good idea to assess it’s financial status, using public information available through government sources, two documents can allow proper assessment. A statement of comprehensive income and a statement of financial position.

Company value calculations

Statement of comprehensive income

A statement of comprehensive income is a usually detailed report listing the inflows and outflows of capital of a business. They often include exceptional expenses and net profit for a business and subsequently can be difficult to follow but should provide a good understanding on how a business functions through the financial year.

Statement of financial position

A statement of financial position outlines the inventories, assets and equity a business has at the end of a year or season. It may also help to identify where most of a businesses cash is being spent or held in assets.

What are the benefits of these documents?

A statement of comprehensive income will help to identify the basic operations of a business, for example the yearly turnover. A company that makes more turnover than another, however may not be financially better or worse however as it can depend on how the money is used, fortunately there are many equations that can help us to define a standard for these figures that we can use to compare between businesses or yearly statistics.

Gross Profits

Gross profits allow us to determine how much profit a company makes after selling it’s products, this is already better than revenue as it shows that a company may be making a lot of revenue, but may be spending it all on sales. It is usually defined in the statement of comprehensive income.

Gross profit is Sales Revenue – Cost of Sales.

This figure is useful, but can be more effective when coupled with a percentage, as it is would allow us to compare for example previous years income, as below, it is for this reason we use the Gross Profit Margin to calculate a percentage.

Gross Profit Margin is (Sales Revenue – Cost of Sales) ÷ Sales Revenue. Higher is better.

BusinessGross ProfitGross Profit Margin
XYZ Telecoms$470,00051.32%
AB Telecom$460,00079.92%
AT TEL$430,00030.10%

As you can see from above the company XYZ Telecoms makes more money than AB Telecom however it is much more inefficient in it’s spending and therefore could reduce the cost of it’s sales to get higher returns. Note that although AB Telecom makes a higher Gross Profit Margin it does not make more money. Here is a breakdown of another Telecom company Telecomatic and they spend roughly 40% of their Revenue on sales, and therefore have a gross profit margin of 60%. In other words, if 40% is spent on sales, the company keeps the other 60% barring any other costs, like fixed costs.

RevenueCost of SalesGross ProfitGross Profit Margin
$100,000$40,000$60,00060%

Using gross profit and the gross profit margin is advantageous because it;

  • Enables you to calculate if spending on sales is too great.
  • Identify which company is better at sales spending.
  • Enables to identify if year on year a businesses spending on sales has been successful or not.
  • If there are two company chains, in two different locations with similar sales revenue, if they were to use different methods of advertising the sales profit margin would allow you to determine the best method based on the higher percentage.

However it does not;

  • Account for exceptional items or income.
  • Account for Fixed costs, such as machinery rent or leasing.

Operating Profits

Operating Profits are the next step of a businesses true income, operating profit accounts for overheads (expenses) that a business has to pay in order to function, expenses like factory ownership or employee pay and should easily be very close to a businesses true profit for the year if the business is new or homogeneous in nature. Operating profits however do not account for or should not account for;

  • Exceptional expenses, like purchasing new facilities or machinery.
  • Assets a business may hold of value.
  • Creditors.
  • Financial income or company dividend.

Operating Profit is calculated by Gross Profit – Overheads. Operating Profit Margin is calculated by (Operating Profit) ÷ Sales Revenue.

Yell TellThis year
Sales Revenue$848,100
Sales Expenditure$298,100
Gross Profit$550,000
Gross Profit Margin54.20%
Expenses$130,000
Operating Profit$420,000
Operating Profit Margin28.30%

Net Profit Margin

Lastly, for the comprehensive income sheet, the Net Profit Margin will show the overall effectiveness of the businesses expenditure. And represents how much raw profit a company makes based off its revenue, to put this into perspective its how much money is profit when multiplied by the turnover, so if a company’s net profit margin is 17%, and they turnover $1m a year, the company will have $170,000 unconditional capital left over at the end of the year barring complications.

The Net Profit Margin is calculated by Profit for the year ÷ Sales Revenue.

Market Research

When conducting market research businesses need to take risks and may be uncertain on the performance of those risks, however market research allows businesses to minimize the risk.

Market research in a dynamic market can be difficult as it can be hard to gauge what is an acceptable metric and one that will not change or become inaccurate. Businesses invest thousands in trying to calculate what the next big trend will be and even more in advertising.

  • Selling Products is the ultimate goal for market research, however it may allow a business to better define its product for market
  • Dynamic markets can provide access points for rapidly growing start-ups
  • Markets can be dominated by Oligopolies, Monopolies or have low demand, which can mean that a business will struggle to set-up there
  • Market research could be very expensive for a business and it has many pitfalls and benefits

There are a number of techniques that businesses can use to identify if they should set-up a business.

  • Competitor Analysis, anything that allows a business to know what the otherbusiness competing are up to is competitior analysis.
  • Crime Levels, Crime can ruin a business so it is important that a business is in a safe loaction, a jewlers in a poor area won’t do very well.
  • Average Wage, wages could contribute to the staffing levels available for the businesses.
  • Footfall, people who walk past the business.
  • Client Need, Some business may setup new premisises as a client has created a demand.
  • Overhead, a rented building with too high overhead may not be viable as a solution.
  • Start-up Cost, some businesses cannot create a start-up without initial funding, especially if their project has great risk.
  • Population/Target Market, local area business may not be able to set-up a business because the demand is so low.
  • Public Opinion, some people may not like the idea of a business setting up in a particular area.
  • Local Economy, the local area may not be affluent enough.
  • Building Space, some business premises may not be large enough.

Some Market Research Techniques

Businesses can use multiple techniques to find out these aspects, such as:

  • Internet
  • Survey
  • Observation
  • Landlord Conversation
  • Questionnaire

market research creative study

Market research does have limitations,

  • You cannot constantly keep asking the same customers
  • You cannot ask some questions
  • Data could be inaccurate
  • It is expensive
  • It is not always your own data
  • It product idea could be stolen
  • The market could be fast changing
  • There could be leading questions or biased interviews when asking individuals

 

 

The Working Capital Cycle

The working capital cycle is a proportion of a businesses working capital that is used to allow a business to operate normally, it is the funds required by a business in order to continue trading efficiently. Without a business being able to calculate how much working capital it needs in order to operate, then it may find it hard to continue to function, the working capital cycle involves anything from inventory and supplies, to production and storage. Without proper working capital, it could lead to business failure.


inflows outflows. the working capital cycle showing individual associated cost below it

The Working Capital Cycle

The working cycle has limited use as a single planning tool, however when combined with multiple tools, it can provide a very powerful overview of what a business works with month, to month. Just because a business has inflows of $1m each month, it does not mean that they make $1m profit. The working capital cycle will also allow a company to identify any ways of keeping a positive cash flow through better trade terms as well.

Each ‘stage’ of the capital cycle has multiple costs associated with it. Just because a product needs to be stored, does not mean it has not cost, there may be refrigeration cost, it could be perishable, it may need a security guard to look after the facility, the lights and electricity around the building all need to be paid for. It is important that a customer receives the product as soon as it is made, as it means that overall there is less cost associated with the product, additionally for products like clothing and fashion accessories or technology, the longer it is stored could also mean that its value is decreased as it goes out of fashion.

Over trading could also mean that a company may not be able to pay for the process to be completed using its normal working capital and may have to secure new funds for the time being until the debt is paid after they have sold the product.

Garbage in Garbage Out Data

When you signup for a website. You enter your information (or data). You don’t always get it right and could miss a box or spell your own credentials wrong (garbage), this data in an ICT system is very important that it is minimised. There are numerous ways that this can be accomplished.

Data must be correct

In order to have an accurate IT solution, your data must be correct, otherwise users may find your solution hard to use. It is important that you minimise GIGO through thorough data validation.

Garbage in Garbage Out

garbage in garbage out

 

When you enter data into an ICT system it is vital that your data is accurate, valid, and up to date. This can be accomplished though input validation. When you enter data, it should be of top quality it is vital that GIGO does not occur. GIGO is garbage in, garbage out, and refers colloquially to the fact that whatever you put into an ICT system, such as garbage, is what you will get out. This is because ICT systems are designed to preform the task that they were designed for, and doing tasks that aren’t what they are supposed to do, will inevitably produce garbage as computers work by logical process. An example of this would be putting an email address in a phone number box on contact information, and when ringing someone, the call does not connect, because it cannot ring an email address.

To stop this sort of thing from happening you must read instructions, follow tutorials and understand the implications of what you are doing, otherwise you could corrupt your data.

Data should be accurate, up-to-date, reliable, complete, correct, designed for purpose and when entered, it should be paramount that it follows these principles, otherwise your it solution could produce frustrating results that the user does not expect. Make sure your data is accourate by forcing users to enter it correctly.