Download The Seven Key Printing Industry Ratios from 2014

The Seven Key Printing Industry Ratios
from 2014
Profit leaders—printers in the top 25% of profitability—saw profits increase to 10.3% in
2013 and the forecast looks like increasing profits into 2016, based on the 2014-15
Ratios results. Now is the time to make a decision—do you invest those extra profits into
growth areas, or do you save for a rainy day? Here Ed Gleeson, Director, Center for
Economics and Market Research and Stu Margolis, Partner, Margolis Partners, give a plainEnglish explanation of the Key Printing Industry Ratios you need to be aware of—to keep
your business strong both in good times and in bad.
Increasing profits enable companies to grow by generating capital that can be invested into
additional productive capacity, hiring additional workers, and moving into new facilities.
Profits can also be retained as a buffer for difficult times, and/or reward shareholders with
dividends. Profits play an important role in the success in the economy and our industry.
John E. Silvia, Chief Economist, Wells Fargo Securities states this regarding profits, “When
viewed from the context of the business cycle, profits are a residual, or a buffer to
fluctuations in the economy. Relative to real factors such as economic growth or
employment, as well as inflation, wages or interest rates, profits are far more variable. As a
buffer, profits fluctuate significantly over the cycle. Over time, however, profit growth tends
to remain stable, indicating that the pace of profit growth is consistent with the pace of
economic growth and the offsetting effects of changes in input costs and sales revenues.”
At the current phase in the business cycle, printing industry profits are increasing along with
capacity utilization. Profits declined slightly in 2013 compared to 2012, but according to
recent readings from various sources printing industry profits are trending upwards in 2014.
This increase in profitability along with signs of increasing shipments and capacity utilization
make it a good time to review our top Seven Key Printing Industry Ratios.
Preparing for the future
First, though, let’s take a closer look at why these ratios are important. In good times (relative
to the past few years) it’s important to ensure everything is in line to prepare for the eventual
cyclical downturn (recession). We currently forecast economic growth to continue into 2015
and 2016, but forecasts past a two-year horizon contain many assumptions and increased
variability. In other words there are too many unknowns for us to accurately forecast out past
the two year mark.
To view the cyclical nature of profits we plot Printing Industry Profitability vs. changes in
Real Gross Domestic Product in Figure 1. When comparing printing industry profitability to
changes in Real GDP we use profits as a percent of value added instead of profits as a percent
of sales. GDP is measured in value added terms, so we adjust our industry profits in the same
way to view how the two measures vary over time. The variability in RGDP explains 29% of
print industry profits and the two measures have a positive statistically significant
relationship or correlation.
Figure 1
In Figure 2, we compare Printing Industry Profit Growth Rates to Real GDP growth. This
figure depicts two relationships. 1) GDP growth rates and Print Profit growth rates tend to
change in the same direction, and 2) Profits are far more variable than GDP Growth Rates.
The variability in printing industry profits has increased during the past recession due to both
declining sales and profits. Industry shipments began to show modest increases in 2011 and
2012 combined with increasing profitability resulting in profit growth rates of 26% and 56%.
In 2013 due to a slight decline in profitability, profit growth rates declined by -0.23% while
the economy grew by 2.2%.
Figure 2
In 2014 and 2015 we expect industry profitability to be on par with the 5-year moving
average to our last expansion (Figure 1: 2003 to 2007, the 5-year moving average was
4.04%).
Find out where you stand
So what Ratios should you use to track and compare to industry leaders? Below are the top
ratios we recommend. These are what your bankers, vendors, and/or prospective buyers use
to determine the value your business and your financial health/riskiness. So why would you
chose to ignore them when you can embrace them? These ratios measure how leveraged your
company is, your ability to meet current and future debt obligations, profitability in terms of
sales and value added, and your collection procedures.
2014 Key Printing Industry Ratios
1. Cash Flow Coverage (Fixed Cost Coverage): This is perhaps the most important of
your key ratios when seeking financing. It’s the standard ratio used by banks to
determine if you are generating enough cash to pay your notes. It is the available cash
generated by current operations to pay debt; EBITDA, divided by debt service
payments. Most banks today may want this information on a continuous quarterly
basis—or even continuous monthly for troubled companies. Failing to meet this ratio
because you have had a bad year results in a covenant violation—and opens up a real
Pandora’s Box of potential actions by the bank (increased rates, penalties,
restructuring your entire arrangement). We like to see members maintain a minimum
of 1.25 here since the covenants in those bank agreements are typically 1.2 to 1.25.
2. Current Ratio: As the indicator of your working capital, this immediately tells banks
and vendors if you can meet your operating obligations in a timely manner. Taken
alone, current ratio is a snapshot of where you are; but when tracked overtime, it also
shows where you are trying to go. While the profit leaders are at 1.53:1, achieving the
“gold standard” of 2:1 gives you a lot of ability to withstand losses or even a down
year. We recommend you monitor this monthly.
3. Debt to Equity: This leverage indicator reveals not only how much debt you have,
but your ability to repay it and to withstand a down turn. In a highly capitalized
industry like commercial printing and packaging, we like to see no higher than 4 to 1
here; but for most industries a good goal is 2 to 1. Currently profit leaders in the 2014
survey had a 2.4 to 1 and the average printer 2.86 to 1. The lower this ratio is the
better.
4. EBITDA as a Percent of Sales: This indicator allows you to compare your company
to others of your size in the industry. In the mergers and acquisitions arena for the
printing and packaging industry, prospective buyers are looking for companies that
are at least at the 10% minimum. This ratio is typically monitored annually, although
it can also be done throughout the year.
5. Sales per employee: This computation shows the relationship of the sales produced
as they relate to each employee in the firm. Many printers have often asked how many
employees it should take to produce the current sales volume. This ratio gives you the
ability to calculate the number of employees needed by industry profit leaders.
6. Value added per employee: Value added is another way to say sales of a company’s
own manufacture. Value added is sales less material costs and outside services. Value
added can be the most important component in measuring your firm. This ratio shows
the value added or manufacturing by each of the employees of your company. In 2013
the average firm value added per employee was $98,822 compared to $109,917 for
profit leaders; or profit leaders generate 11.2% more value added per employee than
the average firm.
7. Receivable days outstanding: This ratio shows the average period required to collect
receivables and the effectiveness of your collection procedures. The sooner the
receivables are collected, the sooner the money can be put to use…to invest in
additional assets, to pay off debt obligations, or to earn interest. Two ways to shorten
the collection period of receivables are 1) bill customers promptly after a job is
complete and 2) seek good credit worthy customers. Most years profit leaders average
receivable days outstanding is 45 days. We have members that average 30 days,
believe it or not.
How do you compare to the profit leaders? Determining where you are is the first step on the
path to improved profitability. Making changes in your operations, purchasing, collections,
sales, and other areas takes time, effort, and careful managerial oversight. We expect the next
two years to bring modest growth to commercial print shipments and profits, making this a
good time to aim for the 2014 Key Printing Industry Ratios. The financial and operational
ratios above are industry averages.