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CORPORATE ASSESSMENT

LEGAL ASSESSMENT IN MELBOURNE

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Corporate Assessment for ongoing Directors

Corporate Due Diligence-Finance, Strategic Direction & Governance
 

FINANCE

  • What financial issues exist for this company?
     

STRATEGIC DIRECTION

  • What is the apparent problem with the board’s current role in the development and management strategy at this company?

  • What does Behan Legal recommend the board should do about this problem?
     

GOVERNANCE

  • What problems exist in the composition of the board?

  • What does Behan Legal recommend on how to address these problems?

In assessing corporate competence and responsibility, Behan Legal analyses the components before looking or digging for data and information that will form the basis of its Corporate Assessment. It does not give accounting advice; however, clients can choose suitable accountants from the Behan Legal panel.  

NEED MORE INFORMATION

Behan Legal assists and advises on these important issues only in conference. For an appointment, call 03 9646 0344 .

Performance Indicators

Years

Return on Assets (ROA)

Profitability Performance Indicators

EBIT

EBIT Margin

Gross Margin

Total Operating Expense Margin

Wages Margin

Rent Margin

Asset Performance Indicators

Asset Turnover

Inventory Turnover (in days)

Debtors’ Turnover (in days)

Debt Performance Indicators

Total Liabilities to Total Assets

Total Interest-Bearing Debt to Total Assets

Interest Cover

  Performance Indicators

  Formula

  Comments/Explanations

  Issues

  ROA

  (Return on Assets)

  Ebit

  Total sales

  EBIT is net profit (not earnings) before interest & tax

  TOTAL ASSETS is all current assets, fixed assets & intangible assets

  If ROA is low, look at profitability, asset & debt performance

  How do we increase profit relative to sales? (EBIT/SALES)

  Reduce expenses, become productive

  Maintain expenses & increase sales by increasing price

  Maintain expenses & price but sell more

  How do we improve asset performance? (SALES/TOTAL ASSETS)

  Improve profitability management

  Maintain sales

  Improve asset management- reduce total amount of assets necessary to make sales

  Profitability

  Performance Indicators

  Formula

  Issues

  EBIT Margin

  EBIT

  SALES

  This margin shows by percentage every cent made in every sales dollar before interest & tax.

  Problem areas, include:

  Reduced gross margins (reduced profit on buying & selling stock)

  Increased expenses

  Insufficient staffing structures

  Insufficient sales not covering expenses

  Gross Margin

  GROSS PROFIT

  SALES

  Monitors management & staff ability to profitably buy & sell stock at profit, manufacture & sell stock at a profit, or provide & sell a service at a profit

  If the company does not make sufficient profit at this level it cannot earn money elsewhere. To improve, one must:

  Buy / negotiate at stock lower prices

  Increase selling price

  Reduce manufacturing costs

  Total operating expense margin

  TOTAL OPERATING   EXPENSE-INTEREST

  SALES

  Critical to monitor operating expenses (not interest) such as wages, rent & depreciation as a percentage of sales on a regular basis.

  Investigate any increase as it affects Gross Margin. If it steadily increases, then:

  Calculate specific operating expenses as a percentage of sales

  Identify operating expenses that are increasing over time

  Make recommendations to improve performance

  For example, Wages Margin, Rent Margin etc, will help monitor expenses and the rate of change over time.

  Wages Margin

  WAGES

  SALES

  Rent Margin

  RENT

  SALES

  Asset

  Performance Indicators

  Formula

  Issues

  Asset Turnover

  SALES

  TOTAL ASSETS

  This ratio measures the dollar amount sales generated by the company’s investment in assets.

  Compare the level of asset turnover with industry averages before reaching a reliable assessment of asset performance.

  This turnover is concerned with the balance sheet and concerns itself with how they are used as a productive resource, i.e., the level of sales generated by total assets under the control of people.

  Asset Performance can be improved by:

  Reducing level of investment in non-current assets

  Reducing stock levels relative to sales

  Reducing debtors relative to sales

  Asset

  Performance Indicators

  Formula

  Issues

  Inventory Turnover (in days)

Cost of goods sold

stock

= x (times)

365 days

x (times)

=Y (days)

  This turnover ratio monitors the ability to buy and sell stock as many times a year as possible, or the time the stock remains in the store before it is sold.

  Compare the level of asset turnover with industry averages before reaching a reliable assessment of asset performance.

  But, if the rate increases over time:

  Calculate rate of turnover

  Compare with industry standards & identify if acceptable or not

  Make specific recommendations such as reviewing:

  Buying procedures

  Stock re-order procedures

  Obsolete stock

  Individual product categories

  Stock re-order quantities

  Sales relative to stock levels for specific product lines

  Asset

  Performance Indicators

  Formula

  Issues

  Debtors’ Turnover (in days)

Sales revenue (account not cash sales)

debtors

= x (times)

365 days

x (times)

= y (days)

  This turnover rate monitors the ability to collect outstanding debts and the time debtors take to pay.

  Compare the level of asset turnover with industry averages before reaching a reliable assessment of asset performance.

  But, if the debtors increase over time:

  Calculate rate of turnover

  Compare with industry standards & identify if acceptable or not

  Make specific recommendations such as reviewing:

  Debt collection procedures

  Account sale procedures

  Bad debtors

  Ageing of debtors

  Invoice & statement procedures

  Sales relative to specific debtors

  Debt

  Performance Indicators

  Formula

  Issues

  Total Liabilities to Total Assets

  Total liabilities

  Total assets

  This rate monitors if shareholders’ equity is increasing or being affected by increasing debt performance. Good levels of EBIT may be lost by high rates of interest on borrowed money.

  To improve debt performance:

  Maintain level of assets & reduce debt

  Reduce interest paid

  The rate shows for every $1 invested in assets how much has been borrowed (in percentage) and the amount provided by shareholders in the form of equity. Ideally total liabilities should be 30-50% of total assets and anything higher requires immediate action.

  Debt Performance concerns itself with profit & loss statements and balance sheet, not with assets but with liabilities, which cannot generate a profit.

  Shareholders need good EBIT and only get what is left after interest bearing debt and tax.

  Poor debt management reduces EBIT and final return to shareholders

  Total Interest Bearing Debt to Total Assets

  Total interest bearing debt

  Assets

  = x%

  This rate monitors if there is an increase in interest-bearing debt as a percentage of total assets. It shows the amount of assets being used to finance the interest-bearing debt and what is actually available for tax and dividends.

  For example, the assets are earning ROA and X% of these assets has been financed at Y% pa. Y% pa is calculated by dividing the interest paid by the total interest bearing debt expressed as a percentage, or

  Y%/ROA x X%= Z%

  EBIT on Z% of the assets are being used to finance the interest bearing debt.

  If the rate is increasing:

  Refinance or reduce interest rates

  Improve EBIT as percentage of total assets

  Reduce inventories, debtors and use cash to repay interest bearing debt

  Sell unproductive assets and use cash to repay interest bearing debt

  Sell productive assets and use cash to repay interest bearing debt

  Interest Cover

  Ebit

  Interest paid

  = X (times)

  This rate monitors the capacity to repay interest on all interest-bearing debt.

  It shows how much $X in profit for every $1 in interest that has to be paid from that $X profit.

  It is an aim for an interest cover of at least 5 times.

  Debt

  Performance Indicators

  Formula

  Issues

  Total Liabilities to Total Assets

  Total liabilities

  Total assets

  This rate monitors if shareholders’ equity is increasing or being affected by increasing debt performance. Good levels of EBIT may be lost by high rates of interest on borrowed money.

  To improve debt performance:

  Maintain level of assets & reduce debt

  Reduce interest paid

  The rate shows for every $1 invested in assets how much has been borrowed (in percentage) and the amount provided by shareholders in the form of equity. Ideally total liabilities should be 30-50% of total assets and anything higher requires immediate action.

  Debt Performance concerns itself with profit & loss statements and balance sheet, not with assets but with liabilities, which cannot generate a profit.

  Shareholders need good EBIT and only get what is left after interest bearing debt and tax.

  Poor debt management reduces EBIT and final return to shareholders

  Total Interest Bearing Debt to Total Assets

  Total interest bearing debt

  Assets

  = x%

  This rate monitors if there is an increase in interest-bearing debt as a percentage of total assets. It shows the amount of assets being used to finance the interest-bearing debt and what is actually available for tax and dividends.

  For example, the assets are earning ROA and X% of these assets has been financed at Y% pa. Y% pa is calculated by dividing the interest paid by the total interest bearing debt expressed as a percentage, or

  Y%/ROA x X%= Z%

  EBIT on Z% of the assets are being used to finance the interest bearing debt.

  If the rate is increasing:

  Refinance or reduce interest rates

  Improve EBIT as percentage of total assets

  Reduce inventories, debtors and use cash to repay interest bearing debt

  Sell unproductive assets and use cash to repay interest bearing debt

  Sell productive assets and use cash to repay interest bearing debt

  Interest Cover

  Ebit

  Interest paid

  = X (times)

  This rate monitors the capacity to repay interest on all interest-bearing debt.

  It shows how much $X in profit for every $1 in interest that has to be paid from that $X profit.

  It is an aim for an interest cover of at least 5 times.

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