Rizal Philippines
April 9, 2017
1. The basic equation for any investment in business is ROI - return on investments, return on capital. That is why we have the Dupont Formula
GP/Sales x Sales/Total Assets x Total Assets/Stockholders Equity
(Patong) (Paikot) (Laway)
Margin Turn over Leveraging
When we cancel sales, and total assets, we are left with GP/SHE which is the formula
for ROI (we have to fail an MBA student in a panel defense, who cant have the correct
formula for ROI)
Our SEC requires Du Pont Analysis:
1.1 To have ROI it is thus important to have sales, and asset turn over
Margin (patong refers to efficiency) cost reduction. You cant have margin, if the basic business model is wrong, ie sales - cost = GP. No matter how high your sales is, if your are selling less than your cost, you can never have patong. It is the goal of every business thus to:
Increase sales (through marketing and sales efforts)
Reduce expenses, through efficiency, and canvassing lower cost of inputs
1.2 Paikot
Your working capital must be turned around. It must produce sales several times over. If it only turns one round, or less than that you cant expect ROI
How do you increase turn over?
1. By having more cash sales (how do you do this? By offering cash discounts)
2. By having shorter collection period
3. By having dedicated collectors
LEVERAGE (Laway)
1.3 As much as possible, you cant spend 100% of your equity in your business. You must employ OPM (other peoples money) or borrow. Many top execs or industry leader, disdain using their own money. May I call this the Meralco or Tony Garcia (of Philchem) formula. Meralco was bought by the Lopez after the end of Laurel Langley agreement from GTU using the cash flow from operations to pay off the installment on the balance. The cash flow from operations paid the equity. the IPO paid off the loan for the D/P. Tony Garcia showed me how to do it, when he bought a school using practically nothing of the money of the investor
This is only possible if you recognize the risk, ie that the business would be profitable enough, generate the cash flow to meet the agreed repayment period. I had several deals early on when we had terms, and the cash flow from the business sales paid off the balance. You must be decisive enough and bold to generate cash when the payment time comes. During high interest regime, we cant have much of 1.3
The biblical stories and parables support ROI
