Bay Area Corrugated Pipe

1
Bay Area Corrugated Pipe

• How is BACP doing?
• Why?

BACP Performance
2
Profitability is Low

• Return on Equity Net Income/Equity320,000 /
  5,870,000 5.5
• Net Profit Margin Net Income/SalesPretax
  620,000 / 24,000,000 2.6After Tax 320,000 /
  24,000,000 1.3

3
Components of ROE

• ROE Return on Equity Net/Equity Net
  Income / Sales x Sales / Assets x
  Assets / Equity
• Hence, some reasons can be
• Margins too low? Why?
• Using assets poorly? Which ones?
• Use of debt? How costly?

4
Analysis of Costs

• Cost of Goods Sold (COGS) 19,100,000 /
  24,000,000 79.6
• Median for Industry is 77.8
• How important is the difference?

5
Analysis of Costs

• Selling and Administrative of
  Sales(2,690,000 680,000) /24,000,000 14
• Higher than the median (13.7)
• Important?

6
Financing Costs Interest?

• Interest Cost / Sales 910,000 / 24,000,000
  3.8
• Highest in Industry. Why?
• But...Does it really measure financing cost? Why
  is there an EVA?

7
How Does Your Company Think of Its Financing
Costs?

• See Annual Report. Typical examples
• Return on Equity
• Return on Capital Employed
• All financial capital -- not just interest on
  debt
• Moving toward EVA-like measures
• Shareholder returns
• Stock price appreciation dividends

8
How Well Are Assets Used?

• Asset Turnover Rotation of Assets
• Total Asset Turnover Sales/Assets24,000,000 /
  16,000,000 1.5 times
• Nearly last in the industry
• We get less out of our assets than almost anyone!
• Pretax Return on Assets
• Pretax/Assets 620,000 / 16,000,000 3.9
• Dead last.

9
Fixed Assets Current Assets

• Fixed Asset Turnover Sales / Fixed Assets
  24,000,000/3,400,000 7.1x
• Dead last
• Current Asset Turnover Sales / Current
  Assets 24,000,000 / 12,600,000 1.9x
• Dead last

10
Current Assets Receivables

• Turnover Sales / Accts Receivable
  24,000,000 / 4,600,000 5.2x
• Days 365/Turnover 70 days
• At the Median 10x, or 2.4MM in Receivables
  Could reduce by 2.2MM

11
Current Assets Inventory

• Turnover Cost of Goods / Inventory
  19,100,000 / 7,200,000 2.7x
• Days 365/Turnover 138 days
• At the Median 6.3x, or 3MM in Inventory Could
  reduce by 4.2MM

12
Conclusions So Far

• Overinvestment in Assets
• Total Assets (all of them!)
• Fixed Assets
• Accounts Receivable
• Inventory
• That causes Too much investment that somebody
  has to pay for.
• A/R and Inventory Alone gt6MM

13
Reduce Assets by 6MM and...

• What to do with 6MM?
• One alternative Pay off interest-bearing debts
• Thus No interest costs
• Thus Pretax Income Operating Income, or
  1,530,000
• After tax, maybe 780,000 and Achieve an ROE of
  13 (780/5870) Mediocrity!

14
Summary Points

• Financial ratios really can help identify the
  problems of an underachiever
• To be meaningful, compare
• Across time
• Across similar firms (comparables)
• and calculate consistently
• Good values for ratios depend on the nature of
  the business

15
A Global Revolution

• Assets require capital. Capital costs.
• Competitive? Great asset management
• Competitive? Great cost management
• and that work never stops
• Examples
• Just in time inventory
• Private equity Consolidation plays
• UPR Domestic, but produce fast

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Example Assets in Petroleum

• Since around 1984 An industry very focused on
  asset quality and cost control
• Look at annual reports
• Quality of assets
• Productive assets
• Produce sooner
• Apply technology to increase output
• Reduce costs. Reduce costs. Reduce costs.