-> Matrix used by auditing & consultancy companies.
Axes:
-> In both we consider the average of the industry where the co9mpany is competing (available online).
- Risk expressed in terms of D/E;
- Operational Efficiency in terms of ROA.
ORIZONTAL (Operational Efficiency) AXIS: ROA, Return On Assets (=EBIT/Tot Assets) -> revenue/ operating costs;
- IDEA: understand operational efficiency of the company
- How well the middle management use the resources gived;
- Operative activities;
- OVERPERFORMING the MARKET: when ROA > industry average.
- ROA < industry average => company is not exploiting its competitive advantage in the right way.
VERTICAL (Risk) AXIS: tot liabilities/ revenue;
- There are different formulas;
- Financial activities;
- Average refers to the average of the industry (same industry) of the L. over the revenue;
-> PARETO APPROACH: Consider whose company that the sum of the revenue is equal to the 80’% of the industry.
(theoretical prospective we should use everyone in the industry)
- The assumption that the two up sector are risky is wrong, they’re riskier than the average.
- If D/E (of company) > 3 => company is in risk.
-> Is a psicological ratio and rappresent the original shape
- Higher the interest costs <=> higher the probability that EBIT won’t cover them and the net income could be negative.
❓ Why company is able to generate profit? -> To understand the capability of profit of the comany.
-> Bank ask the company to pay higher costs for financial debts because they’re more risk.
- Financial costs structure would be more high.
The Quadrants:
| 🚫BAN AREA: EBIT 🔻; Interest Cost 🔺 (ICR probably low); Should be avoided; Financial costs and debit high. EBIT/A < 1 => company can’t pay debts; | ⚡THUNDERBOLTS AREA: company is the leader EBIT 🔺; Interest Cost 🔺; if EBIT 🔻 & financial costs remain as they are => you’re in a storm, is a risky situation; ACR: EBIT / Financial costs = 1 (they’re similar). |
| ☁CLOUD/ FOGGY AREA: Company is a follower. EBIT 🔻; Interest Cost 🔻; -> Small EBIT and even financial costs => not problematic but isn’t clear how’s going the company; | 🤑HAPPY FACE: company is the market leader; EBIT 🔺; Financial costs 🔻 (low interest costs); ❓Is the situation stable? |
⚠Moving to the right horizontally is IMPOSSIBLE: it means that the company should change its competitive advantage and become the market leader, increase the CA without increase the Investments (impossible).
The “Ideal Journey”:
☁ Company is not competitive and needs changes.
=> Tipically create new assets (tangible or intangible) -> ask money (baks, shareholders) => Have debts
EBIT/Financial debts 🔺
EBIT (=) => moving to the left/top -> 🚫
-> When assets start to work => ⚡
-> When investments are paying back => 🤑
⚠We’ve to consider COMPETITORS:
- They decrease the price of the product;
- Company’s not able to decrease the revenu
