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 plain-English 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. To purchase Ratios specific to your market segment, printing process, size of firm, and/or region go to www.printing.org/2014-15ratios.