APPENDIX
By the Same Author
• Share Analysis and Company Forecasting
• The Business Plan: A Manual for South African Entrepreneurs
• The Millionaire Portfolio
• Jungle Tactics: Global Research, Investment and Portfolio Strategies
• A Guide to AltX: Listing on SA’s Alternative Stock Exchange
• Become Your Own Stockbroker
• The Corporate Mechanic: The Analytical Strategist’s Guide
• Richer Than Buffett: Day Trading to Ultra-Wealth
• The Guerrilla Principle: Winning Tactics for Global Project Managers
• Women and Wealth
• Lore of the Global Trader
• Master Trader
• Business and Entrepreneurship
• The Penny Share Millionaire
• Welcome to My Trading Room: Volume 1: Foundation of Trading
• Welcome to My Trading Room: Volume 2: Create Your Own Brokerage
• Welcome to My Trading Room: Volume 3: Advanced Methodologies and Strategies
General Key Personnel Attributes
Management and Key Staff
The aim of senior management, also called key management, is to focus their skills and experience and to effectively use available resources and technological systems to attain profit goals. While management understands that it must provide effective leadership and support to attain profits, the following is a list of attributes.
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Positive |
Negative |
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• Develop and implement an appropriate organizational structure • Establish a knowledgeable board of directors • Develop plans to achieve clearly stated measurable objectives • Draft business plans, strategies, policies, and procedures to support the company’s objectives • Effect communication systems • Establish effective reporting principles |
• Unable to increase market share • Cannot achieve profits • Cannot respond to competitive forces • Indecisiveness • Objectives and strategies are unclear • Lack of coordinated controls, communication, and reporting mechanisms |
Marketing and Sales
Marketing objectives are to develop long-term customers and to continually increase this customer base to maximize sales from a loyal base.
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Positive |
Negative |
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• Develop effective distribution channels • Market research and analysis is concise and relevant • Promotion and advertising programs are strong and effective • Sales team understands the market • Sales forecasting is accurate |
• Lack of market understanding • Lack of coordinated and effective market strategy • Sales incentives are not effective • Sales quotas are continually not met • Poor sales training • High turnover of sales personnel • Low morale • Customer complaints vastly outweigh compliments |
Accounting and Finance
Finance’s role is to maintain complete financial records and to provides reports to key staff, such as budgets, forecasts, ratio analysis and cost analysis. In addition, finance has the critical responsibility to establish strong internal controls to protect the company against hackers and theft.
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Positive |
Negative |
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• Timely financial reporting • Smooth and effective accounting processes • Generation of cash flow analysis, forecasts, accounting, and budgets • Periodic review and control of capital expenditures • Proper asset control measures • Increase in the value of assets • Effective internal auditing of program budgets |
• Infrequent financial reporting • Failure to monitor expenditures • Failure to report variances • Lack of documented procedures • Discrepancies • Declining cash management performance • Poor inventory turnover • Inability to identify financial trends • Lack of standards and forecasts • No internal auditing |
The objective of HR is to develop and maintain a capable professional, technical, and skilled personnel.
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Positive |
Negative |
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• Develop compensation policies and incentives • Ensure that remuneration packages reflect industry norms • Establish harmonious relations with unions • Set up staff performance evaluations • Filing system to hold personnel records • Promote staff training |
• Low morale and high personnel turnover • High absenteeism • No respect for management, customers, and clients • Labor strikes and slowdowns • Poor communication • Lack of staff training program |
Basic Due Diligence Checklist
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General field of investigation |
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General |
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Corporate image |
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Financial statements |
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Assets |
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Employees |
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Sales strategy |
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Marketing |
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Industry in which the company operates |
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Competition |
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Systems |
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Legal, corporate, and tax issues |
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Company contracts and leases |
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Suppliers |
• Do you have a business plan?
• General information regarding the company: address, contact details, directors’ resumes, etc.
• Origins of the company/history/key achievements/milestones.
• Company facilities.
• The capital required—what is it intended for? Provide a breakdown.
• Business and corporate objectives.
• A brief overview of company changes since inception.
• SWOT analysis.
• Do you have in place an industry/market analysis related to competitors, market trends, and other environmental factors that could affect investor sentiment after an AltX listing? These factors include the following:
Political/union
Economic
Business/finance
Technological
• Overview of the industry in which you compete and operate.
• Your competitive edge.
• Do you have a company profile?
• Do you have an Internet site?
• Do you have a marketing/communication strategy?
• Key success factors (value drivers).
• Strategy and implementation.
Corporate Image
• What is the company’s public image? Have there been any tensions between the community and the company?
• Has there been anything in the media that would reflect negatively on the company? If so, how has the company dealt with significant negative publicity?
• Are there any pending lawsuits against the company?
• Is the company willing to accept limitations on the publicity?
• Detailed income statement, cash flow statement, and balance sheet (annual reports) for the past 3 years up to the present moment. Plus forecasts for as many years as you may have.
• All supporting schedules to the foregoing financial statements for the periods listed.
• These schedules should be split by major product lines, if available. There should be separate schedules for local and international markets.
• Accounts receivable per major customer for the past 3 years.
• Physical inventory summary or detailed breakdown of inventory (raw materials, work in process (labor and overhead)) for the past 3 years.
• Accounts payable by vendors for the past 3 years.
• Listing of accrued expenses for the past 3 years.
• Tax returns for the past 3 years.
Marketing
• Customer order reports. This is split up per customers and product lines for a period of at least 3 years.
• Listing of shipments by customers and product lines for the past 3 years up to the present moment.
• Listing of outstanding customer contracts and outstanding customer bids for the domestic, export, and international divisions.
• Description of all manufacturers’ representative organizations, agreements, and commission schedules.
• A list of buying sources: domestic, export, and international.
• A list of customers, contracts, and outstanding payments.
• Products, services, sales, and pricing strategies.
Personnel
• Management and shareholder structures, plus group organogram.
• All employment contracts or agreements.
• All bonuses, deferred compensation, share option schemes, profit sharing, and retirement programs.
• All pension plan documentation, including actuarial reports, tax returns, and funding requirements for the past 3 years.
• Schedule of hourly wage rates and number of personnel at each rate.
• Organization chart of salaried personnel.
Contracts and Agreements
• All contracts or agreements with:
Vendors and customers
Employees
Unions
Other third parties
• All recent (within 3 years) appraisals of property, machinery, and equipment.
• A list of machinery and equipment. Please provide information on:
Assets owned
Financed
Net asset value (NAV)
Values of assets (depreciated and net)
• All outstanding insurance claims.
• All patents, copyrights, and license agreements.
• All lease or purchase agreements for machinery and equipment, vehicles, and property.
• Legal descriptions of all property, including deeds, title reports, and title insurance documentation, together with documentation of any lien thereon.
• Listing and description of all outstanding litigations or anticipated litigations.
• Is union contract transferable? If yes, then description of mechanics of making transfer, such as required approvals.
Ratio analysis equations
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Area |
Ratios |
Calculation of Ratio |
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Solvency |
• General solvency check |
[(Fixed assets + investments + current assets) ÷ (long-term loans + current liabilities)] × 100 |
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Liquidity |
• Current asset ratio |
Current assets ÷ current liabilities |
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• Quick ratio (acid test) |
(Current assets − stock) ÷ current liabilities |
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• Stock-to-working capital ratio |
(Stock ÷ net current assets) × 100 |
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• Defensive interval ratio |
Defensive assets ÷ projected daily operating expenses |
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Profitability |
• Profit margins |
(Any profit figure ÷ turnover) × 100 |
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• Return on shareholders’ equity |
(Attributable profits ÷ shareholders’ funds) × 100 |
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• Return on net assets |
(Attributable profits net assets) × 100 |
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• Return on capital employed |
(Operating income capital employed) × 100 |
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Efficiency |
• Stock turn |
Group turnover average stock |
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• Accounts receivable days |
Accounts receivable ÷ (turnover ÷ 365) |
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• Accounts payable days |
Accounts payable ÷ (turnover ÷ 365) |
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Leverage |
• Debt–equity ratio (gearing) |
[(long- and short-term loans + overdraft − cash) ÷ Ordinary shareholders’ funds] × 100 |
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• Proportional debt ratio |
Long-term loans ÷ total assets |
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• Ordinary shareholders’ interest |
(Ordinary shareholders’ funds ÷ loans) × 100 |
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• Long-term debt to capital employed |
(Long-term loans ÷ capital employed) × 100 |
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• Interest cover |
Pretax income ÷ interest paid |
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• Average interest rate |
(Interest Expense − accounts payable) ÷ liabilities |
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• Gross cash flow-to-total debt ratio |
[Gross cash flow (prior dividends) ÷ loan] × 100 |
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• Cash flow-to-assets ratio |
Cash from operations ÷ total assets |
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Investment Performance Ratios |
• Earnings per share (EPS) |
(Attributable profit ÷ Ordinary Issued Shares) × 100 |
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• Dividend per share |
(Dividends payable ÷ Ordinary Issued Shares) × 100 |
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• Dividend cover |
EPS ÷ dividend per share |
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• Earnings yield |
(EPS ÷ share price) × 100 |
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• Dividend yield |
(Dividend per share ÷ share price) × 100 |
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• Dividend payout ratio |
Yearly dividend per share ÷ EPS |
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• Price–earnings ratio |
Inverse of earnings yield |
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• Price–earnings growth (PEG) |
Price–earnings ratio ÷ company’s projected year-over-year earnings growth rate |
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• Book value per share |
(Shareholders’ equity − preferred stock) ÷ average outstanding shares |
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• Debt–asset ratio |
Total liabilities ÷ total assets |
Liquidity: It is the measure of how much free cash there is in the business. This is critically important. The more cash the business has, the less the risk that is attached to the business. It not only cushions the business against bad months from a sales perspective but also allows the business to grow faster and perhaps take advantage of special offers and bulk buying opportunities, which can improve profit margins even further.
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Current ratio |
> 1 = okay > 2 = preferred |
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Quick ratio |
> 1 = good |
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Net working capital |
> 0 = okay but no room to move > 3× total expenses is good. 6× or 12× is a lot better. |
Assets: It is a measure of how well certain assets are being utilized.
• Debtors’ days ratio: This helps the entrepreneur to understand how quickly the debtors are paying and is a measure of how efficient the organization is at collecting its money.
• Creditors’ days: This helps the entrepreneur to understand how quickly the creditors are being paid and is a measure of how efficient the business is at collecting its money. It also indicates how much leeway there is in its payment terms.
• Fixed asset turnover: This is a measure of how well-fixed assets are being utilized in generating sales.
• Current asset turnover: This is a measure of how well current assets are being utilized in generating sales.
• Total asset turnover: This is the harshest measure indicating how well total assets are being used in generating sales.
Debt ratios: These ratios measure the gearing of the business, that is, the amount of debt the business has.
• Debt ratio: an indicator of how much debt a business has in relation to its assets.
• Debt equity: an indicator of how much debt a business has in relation to the equity it has.
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<1 |
The business is in deep trouble and is unlikely to be able to continue. |
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>1 |
The business is doing well. |
Profitability ratios: These ratios measure the profitability of the business in different ways.
• Return on equity: This ratio measures the return on the shareholders’ equity. It is a measure of how efficient the business is in using the equity to generate profit.
• Return on total assets: This ratio measures the return on the business’s assets. It is a measure of how efficient the business is at using the assets to generate profit.