Strategic management Archives - Consilue

EBITDA and EBITDA margin

administrator — Mon, 19 Mar 2018 11:49:50 +0000

The EBITDA is a well-known financial metric. It is considered as the best approximation of operating cash flows and thus consequently a crucial indicator for managers, bankers, appraisers, analysts and other industry practitioners.

In other words, EBITDA gives you an indication of how much earnings before interest, taxes, depreciation and amortization the company makes with all the invested capital. Negative number is a red alarm for a company, meaning that the company is facing fundamental problems with its operations.

Normally practitioners consider normalized EBITDA only (management adjustments, pro-forma adjustments and other adjustments), since one off events may sometimes represent a significant role.

Due to fast and easy use of EBITDA, the metric is dominating the financial world. Its applicability makes it a #No.1 indicator. Furthermore, it is often used in relation with debt, value and performance indicators:

– Leverage: Financial obligation/EBITDA

This metric measures how does the debt relate to the ability of generating the operational profit. It can be argued that a leverage > 4 is not acceptable for banks anymore.

– Interest coverage: EBITDA / Interest expenses

This metric measures the ability of a company to cover its interest out of its operations. It is obvious that a ratio <1 is not sustainable.

– Value multiplier: Enterprise value/EBITDA (EV/EBITDA)

This metric measures how the market values the firm according to its ability to generate operational profits.

– Performance indicator: EBITDA / Total revenues (EBITDA margin)

This metric is a relative indicator and offers a great way to compare the company performance with its competitors.

EBITDA is further developed into EBITDAR and EBITDARM in cases where costs such as rents, restructuring fees and management fees represent a significant amount. These is especially typical for retail industry, REITs, hospitals, etc.

Nowadays more and more financial practitioners are aware of the underlying interpretational problems of EBITDA. The metric that overcomes the disadvantages of EBITDA is the economic value added model (so called EVA model). Even though the model as such is more advance, it relays on subjective assumptions related to the cost of capital calculation.

Are you interested in boosting your EBITDA? Check our performance improvement services or contact us directly!

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Key success factors – a must for a good corporate strategy?

administrator — Mon, 19 Mar 2018 11:39:36 +0000

Key success factors (also referred to as KSFs) refer to one of the crucial strategic tools. Correct understanding of the key success factors is a good base for a well-structured company differentiation.

Although key success factor refer to a different concept as key performance indicators (also referred to as KPIs), these two are in fact intertwined. As long as the monitoring system is properly set up, the management monitors the effectiveness and efficiency of operations with key performance indicators, designed based on the key success factors.

Key success factors are key to proper development and execution of strategy.

Let’s name most obvious key success factors for shoe industry in order to understand what this concept is all about – i.e. quality, price, comfort, branding & marketing, style & aesthetics, design & fashion, reflectance of the customer’s style, technology etc.

Not all key success factors are of similar importance for the target group.

Luxury shoe brands will most likely differentiate based on key success factors such as:

Brand image
Unique design
High quality (production, material)
Prestige
Reflectance of the customer’s style

… while casual/sport shoe brands focus more on:

Reasonable price
Comfort
Brand image
Sponsoring athletes
Technology

Once a manager understands key success factors, he/she understands why for example a shoe giant Geox, that technologically revolutionized the shoe industry with its breathable shoes, has dominated the casual shoe brands for years. Furthermore, also expanding to casual clothes segment seems rather logical and much wiser decision as luxury shoe brand segment penetration.

Often key success factors have some critical level of acceptance. The company needs to respect it in order to ensure its existence on the market. Often, these factors relate to security, regulation, privacy, ethics, quality, price etc.

Once critical success factors and key success factors are defined, they should be supervised on a regular basis. Strategy is a living thing, especially if its build mainly based on intangibles such as image, brand, trends etc.

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Case study: Acquisition of client database

administrator — Mon, 25 Sep 2017 11:50:20 +0000

Client’s pain:

The client is a small company, operating in the plastic industry, specializing in the next generation packaging solutions. The company works for prominent clients from cosmetic, chemical, food & beverage, pharma and medical industry worldwide. The company is about to expand its presence in the Latin America. As planned, strengthening the presence in the emerging markets would most likely result in the projected two digit growth rates and EBITDA margins.

The client has developed strategic partnership relationship with its indirect competition all over the globe. Intense cooperation resulted in cost synergies and sharing of a supplier-side know-how. The indirect competitor’s owner has experienced a serious financial problems and thus a decision to divest the business has been accepted.

Addressing the pain:

Firstly, the client has decided for a general overview of the indirect competitor’s past operations. Based on the preliminary findings, the client has decided to continue only with the acquisition process of the most valuable asset – the existing customer database.

Later on the advisor has prepared the client a revision of the competitor’s past projects and their profitability analysis. The findings served as a base for the determination of key variables and preparation of the financial projections, calculation of synergies and customer database valuation.

In order to be able to achieve the full potential as planned in the financial projections, the client has been advised to employ competitor’s key sales personnel.

Results:

The acquisition of the customer database and complementary activities are expected to result in significant revenue and cost synergies and geographic risk dispersion.

Client’s testimonial:

It is very important to be aware of the fact that valuing the customer database from the perspective of “as is” projections and from the perspective of our business (reflecting our business model) varies. It messages significant synergies. Furthermore, taking over customer database with key employees is “a must” – it is a good oportunity to gain new capabilities.

Advisor’s thought:

The client is about to gain short term and long term boost in its operations through new emerging market penetrations and risk diversification. Last but not least, fulfilling the sales capabilities gap will enhance the company’s position and its ability to compete with significantly larger global players.

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