“Transparency in Financial Reporting starts with simple math”
ESCV
Economic Supply Chain Valuation
Recently I heard a radio talk show say Apple is dead because Samsung is finally presenting competition and Apple doesn’t know how to compete. These thought made me stop and think about how Companies are analyzed and I was confused. So I propose a new theory to define a company’s value. The basis for the formula is to determine their economic contribution with the Companies sustainability.
The Company’s impact to the economy extends beyond the employees on their payroll. It must include all those involved in the day to day functions (contractors, sub-contractors, consultants, etc.) and the employees of their supply chain. Every person they buy from is supporting a portion of their company based on each of their customers. A solid economy metric needs to measure the impact of all the companies together. No company can survive without their supply chain partners. This equation determines the impact of one supplier and can also be used to analyze the strength of one industry to another or the impact of one company within an industry.
This simple formula provides an unbiased and extremely transparent method to review a company’s value to the economy and their ability to weather changes in their industry or another bad economic era;
(Employees / Net Profits) : (Supply Chain Employees / Net profits)(Supply Chain Levels) (Assets)
Let’s use a small company as the first example;
The company has $100K in net profits; 10 full time employees, 20 part time employees working the equivalent of 5 full time employees;
100K / 15 = 6,666
Their suppliers attribute 20 full time employees to the business provided by the sample company;
100K / 20 = 5,000
5,000 + 6,666 = 11,666
Next we provide the levels of the Supply Chain included in the equation – 2. The Company is 1 and their suppliers is 2. (Every Supply Chain continues past 1 level – if you buy screws from a distributor, the distributor buys from a manufacturer who buys the raw metal from other suppliers. The raw metal eventually comes from a mining company. Every supplier is part of the Supply Chain and this number identifies how many levels of the Supply Chain have been included in the analysis.)
Next add the cash on hand:
The sample company has $50K in Assets (minus debt);
50K / 35 = 1,428
Expressed as (6.6k : 11.6k) 21.4k
This sample company could survive for 1.4 months without any additional profits.
Why is this important? Because Companies are not based on one month, one quarter or one year worth of value. The value was created over the long term and will result in continued operations for some period of time during which the Company can innovate or even re-invent themselves.
Take a look at a big Company that resembles Apple:
$156B in Revenue; $55.2B in net profits, 47K employees, 257K employees in their supply chain; 510K in a third level supply chain (application developers); and $118B in assets
$156 / 47K = 3329K
$156/ 467K = 335K
3329K + 335K = 3665K
70B / 150K = 466K
$118B / 3365K = 351K
Expressed as (3329k : 335k) 3 351k
Another Company resembling Samsung:
$220B / 344K = 640K
$220B / 67K = 3250K
640K + 3250K = 3890K
$141B / 61K = 228K
Expressed as (61k : 3890k) 2 228k
Apple could support their supply chain for 351K months whereas Samsung could only supply their Company for 228K months and Apple’s supply chain is one level deeper than Samsung’s.
(6.6k : 11.6k) 21.4k
(3329k : 335k) 3 351k
(61k : 3890k) 2 228k
A quick look and its easy to see the overall impact to the global economy and sustainability of all three companies. Each contributes a different value to their own supply chains, their governments and their employees.
Do the math for your company and see how this formula defines your position in your industry.