HOW TO USE

1
HOW TO USE RETURN ON ASSETS TO ANALYZE
DEALERSHIP OPERATIONS
January, 2007
March 6, 2006
2
HOW TO USE RETURN ON ASSETS TO ANALYZE
DEALERSHIP OPERATIONS
January, 2007
March 6, 2006
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• NOTE ON PRINTING Print in Notes Pages format
  to display explanatory text below slides

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BACKGROUND DISCUSSION

• WHAT IS ROA?
• HOW IS IT CALCULATED?
• DEVELOPMENT OF PROFITABILITY DIMENSIONS
• PROFITABILITY PATTERNS

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WHERE
ROA RETURN ON ASSETS NOI NET OPERATING
INCOME A ASSETS
6
BALANCE SHEET
INCOME STATEMENT
SALES COGS GP EXPENSES NOI
50
LIABILITIES
50
OWNERS EQUITY
100
ASSETS
16
WHERE ROI RETURN ON INVESTMENT
NOI NET OPERATING INCOME E
OWNERS EQUITY
WHERE ROA RETURN ON ASSETS NOI
NET OPERATING INCOME A
ASSETS
COGS COST OF GOODS SOLD GP GROSS PROFIT
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BALANCE SHEET
INCOME STATEMENT
SALES COGS GP EXPENSES NOI
CHANGING CAPITAL STRUCTURE CHANGES ROI
60
LIABILITIES
40
OWNERS EQUITY
100
ASSETS
16
NOI
16 40
ROI

40
E
WHERE ROI RETURN ON INVESTMENT
NOI NET OPERATING INCOME E
OWNERS EQUITY
WHERE ROA RETURN ON ASSETS NOI
NET OPERATING INCOME A
ASSETS
COGS COST OF GOODS SOLD GP GROSS PROFIT
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BALANCE SHEET
INCOME STATEMENT
400 344 56 40 16
SALES COGS GP EXPENSES NOI
50
14
GP/S
LIABILITIES
50
10
E/S
OWNERS EQUITY
100
ASSETS
NOI/S
4
NOI
NOI
S
X
ROA

A
S
A
400 100

(14 - 10) X (4) 4 X 4 16
4
X

16
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PROFITABILITY DIMENSIONS ARE USEFUL IN ANSWERING
QUESTIONS AS TO WHY IS A DEALERSHIP PERFORMING
AS IT IS.
GROSS PROFIT TO SALES RATIO
EXPENSE TO SALES RATIO
ASSET PRODUCTIVITY SALES TO ASSET RATIO
NET PROFIT MARGIN OR RETURN ON SALES (ROS)
SALES REVENUE
CAPITALIZATION (ASSETS)
ASSET MANAGEMENT
MAJOR POLICY AREAS
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PROFITABILITY DIMENSIONS ARE USEFUL IN ANSWERING
QUESTIONS AS TO WHY IS A DEALERSHIP PERFORMING
AS IT IS.
GROSS PROFIT TO SALES RATIO
EXPENSE TO SALES RATIO
ASSET PRODUCTIVITY SALES TO ASSET RATIO
NET PROFIT MARGIN OR RETURN ON SALES (ROS)
SALES REVENUE
CAPITALIZATION (ASSETS)
ASSET MANAGEMENT
MAJOR POLICY AREAS
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LARGE FLEET DEALER
BALANCE SHEET
INCOME STATEMENT
SALES COGS GP EXPENSES NOI
480 424 56 40 16
50
11.7
GP/S
LIABILITIES
50
8.3
E/S
OWNERS EQUITY
100
ASSETS
NOI/S
3.3
NOI
NOI
S
X
ROA

A
S
A
480 100

(11.7 - 8.3) X (4.8) 3.3 X 4.8 16
3.3
X

16
12
LARGE SERVICE PARTS DEALER
BALANCE SHEET
INCOME STATEMENT
SALES COGS GP EXPENSES NOI
320 260 56 40 16
50
17.5
GP/S
LIABILITIES
50
12.5
E/S
OWNERS EQUITY
100
ASSETS
NOI/S
5.0
NOI
NOI
S
X
ROA

A
S
A
320 100

(17.5 - 12.5) X (3.2) 5 X 3.2 16
5
X

16
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ROA VS ROS
ROS X SLS/ASSETS ROA
BASE CASE LARGE FLEET DEALER LARGE SVC
PARTS DLR
4.0 X 4.0 16 3.3 X 4.8
16 5.0 X 3.2 16
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• ROI
• NOT RELIABLE IN COMPARING ONE BUSINESS WITH
  ANOTHER AS IT IS DEPENDENT UPON DEALERSHIP
  CAPITALIZATION (DEBT VS EQUITY) AND IS ALSO
  DEPENDENT UPON CUMULATIVE PAST PROFITS OR LOSSES
  AS REFLECTED IN RETAINED EARNINGS
• ROS
• BETTER THAN ROI, BUT STILL NOT RELIABLE IN
  COMPARING BUSINESS TO BUSINESS (OR SCENARIO TO
  SCENARIO) AS IT IS DEPENDENT UPON THE TYPE OF
  BUSINESS SALES MIX SUCH AS LARGE FLEET VOLUME
  (LARGE SALES, LOW GROSS) COMPARED TO LARGE
  SERVICE PARTS (LOWER SALES, LARGER GROSS AS A
  PERCENT OF SALES)
• ROA
• BEST METHOD FOR COMPARING ONE BUSINESS WITH
  ANOTHER AS IT ENCOMPASSES ENTIRE BUSINESS. CAN
  BE STATED AS EXPLANATORY VARIABLES GROSS
  PROFIT/SALES EXPENSE/SALES SALES/ASSETS

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MACRO
QUESTIONS
TOOLS
COMPOSITES ROA REPORT
WHAT IS THE FINANCIAL HEALTH OF THE
DEALER NETWORK? HOW IS A SPECIFIC DEALER
DOING? WHY? WHAT CAN BE DONE TO IMPROVE?
OPERATING REPORT LOSS DEALER REPT.
ROA REPORT COMPASS REPORTS
CAREFUL ANALYSIS OF COMPASS REPORTS
MICRO
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• PROS
• RETURN ON ASSETS ROA
• RATIO COMPREHENDS EVERY FIGURE ON AN OPERATING
  REPORT
• POWERFUL TECHNIQUE FOR DEALERSHIP FINANCIAL
  ANALYSIS
• ANALYZES EACH DEALERSHIP DEPARTMENT
• PROVIDES A WAY TO IDENTIFY OPPORTUNITIES AND
  DIAGNOSE PROBLEMS
• GRAPHICAL PRESENTATION
• EASY TO UNDERSTAND

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• CONS
• PROVIDES CLEAR INSIGHT INTO TRUE PROFITABILITY OF
  DEALERSHIP OPERATIONS
• DIFFICULT TO CALCULATE BY HAND

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Macro - Patterns
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OVERALL DEALERSHIP PROFITABILITY
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ASSET DISTRIBUTION
APPROX. 70 OF TOTAL ASSETS
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SPECIFIC PATTERNS
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BETTER DEALER CHARACTERISTICS
BETTER DEALERS ARE ABOVE AVERAGE IN EACH
DEPARTMENT
BETTER DEALERS ARE ALSO PROFITABLE IN EACH
DEPARTMENT
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STRONG NEW USED DEALER
STRONG NEW AND USED
WEAK MECHANICAL AND PARTS
STRONG OVERALL PROFITABILITY
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STRONG FIXED OPERATION
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WEAK USED PARTS
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HOW TO IMPROVE PROFITABILITY
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PROFITABILITY DIMENSIONS ARE USEFUL IN ANSWERING
QUESTIONS AS TO WHY IS A DEALERSHIP PERFORMING
AS IT IS.
GROSS PROFIT TO SALES RATIO
EXPENSE TO SALES RATIO
ASSET PRODUCTIVITY SALES TO ASSET RATIO
NET PROFIT MARGIN OR RETURN ON SALES (ROS)
SALES REVENUE
CAPITALIZATION (ASSETS)
ASSET MANAGEMENT
MARKETING
MAJOR POLICY AREAS
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