obtained this way and you do not have to forecast for 100 years 10 is probably
the furthest it is necessary to go and a guess can be made of the enterprise value
at that point. Errors from that far into the future will have far less impact, when dis-
counted back, than would similar size errors in next year’s forecast.
The obvious way of dealing with these different techniques for valuation is to
compare the results from each and to come up with a range of values rather than
a single unique value. The approach uses subjective judgement but is no less
accurate, for all that, than the false accuracy of a single approach.
Profit improvement
There are a number of financial ratios that help us to see profitability in context
and therefore create the datum point for measuring profit improvement. The
approach should always be to see how these vary over time and usually looking
at a period of a year in the calculation in order to eliminate seasonal effects that
otherwise will distort the result. Perhaps the obvious example is a retail business
that shows better margins during the run-up to Christmas and also a better return
on net assets. However, most businesses display some seasonality.
All these ratios and measures must be judged critically and within the context
of company strategy because, seen from that perspective, what seems a good
trend can easily be transformed into a bad one. Take gross margin: an improving
gross margin is a prime objective of most businesses… or maybe not. Seen from
the perspective of market share, it may be counterproductive to improve margins
at the expense of sales volumes if this sacrifices economies of scale and allows
the entry of new competitors. Rolls-Royce Motors has pursued a pricing strategy
of high prices and margins that helps to create a cachet for the brand. They pur-
posely put the product beyond the reach of most car buyers. But it is easy to
imagine a business attempting this strategy and failing.
Stock-turn as a measure
Another powerful measure is stock-turn which shows how well a business is
using its investment in inventory. Surely this is an unambiguously a good thing?
As Director of Business Development for Pentos plc which owned 150 Dillons
Bookstores in the UK, I was working late when the newly appointed CEO walked
past my office and came to chat. The overall business was desperately short of
cash. He outlined the importance of stock-turn, on a sheet of paper, and demon-
strated how making that inventory work harder would benefit the whole business.
Simple. My problem, that night, was my inability to explain without sound-
ing defensive why it oversimplified. Everyone claims their business is unique
and many, in doing so, miss obvious and simple opportunities for constructive
change. We assume too much. In this case, though, I failed to prevent an inven-
tory reduction that was immediately followed by plummeting sales. Even high

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