From Google Finance

1 – Real Revenue Growth

AMG is made up of numerous firms that were bought up or merged together. Revenues started declining precipitously in 2015 after robust revenue growth rates in the prior 4 year (an average of 17% annually). The stock market dropped and so did the revenue growth of Affiliated Managers Group.

More on real revenue growth »

2 – Sustainable Revenue Growth

Since 2011 the firm has not had sustainable revenue growth. In other words, the company grew revenues faster than the balance sheet could support them. It wasn’t until the last two years of revenue decline that it is now sustainable. It is interesting to note that 94% of the revenue growth that occurred from 2011 through 2014 was due primarily to the stock market increase.

More on sustainable revenue growth »

3 – Pricing Policy

It is assumed that out of all expenses 25% of revenues is allocated from operating expenses to the direct expenses for all the relationship managers to deal with the clients. Since this is not outlined specifically in the financials it has to be assumed. This means that the pricing policy would be neutral in this analysis.

More on pricing policy »

4 – Operating Expense Control

Operating expenses have been well controlled and growing half as fast as the revenue growth. In 2012, the operating expenses to revenues were 53% and by 2016 they stand at 42% to revenues.

More on operating expense control »

5 – EBITDA to Actual Cash Flow

Actual cash flows are sporadic and often anemic. These cash flows could be stronger and more consistent if the company was not frequently buying or merging with other firms within its industry. That raises another question, addressed below.

More on EBITDA »

6 – Debt Free Cash Flow

Over the period of this analysis – 2012 to 2016 – revenue growth has been approximately 5% a year, while asset growth has been around 12% a year. Total liabilities, however, have grown at 13% a year, which is just not sustainable.

Even just looking at the assets growing near the debt level, I’m skeptical about the quality of those assets being purchased. Most of these assets are in Other Assets, which shows the purchase of other companies in the booking of goodwill. But over the same period of time, the rate of return on assets has declined from 11% to 6%. I hope that this type of investing is not the same philosophy used with their clients.

More on debt free cash flow »

7 – Excess Cash

Excess cash is a difficult concept to discuss with business owners and investors. Holding excess cash does not necessarily make a business financially secure, nor is it a good idea to do just from a prudence viewpoint. Similar to holding excess accounts receivable balances or increased inventory balances or excess fixed assets, it lowers your rate of return and increases your costs capital. Excess cash is a lazy asset that doesn’t earn much.

Almost 80%, $400 million of AMG’s cash assets of 500 million, is excess. They must be holding onto that money to make those wonderful investments we talked about above!

More on excess cash »

8 – Return on Assets

As mentioned above, the return on assets (ROA) is declining and falling under the actual cost of capital, the cost to put money to work in their business. As of March 31, 2017, the implied investors’ required cost of capital to invest in the stock was around 9.33% and the company’s 2016 ROA was only 6%.

More on return on assets (ROA) »

9 – Working Capital Needs

Each year the company covers its working capital needs without a problem (all that excess cash makes this hard to screw up).

More on working capital »

10 – Debt Financing

The company has a book equity of around 58% to total assets. It still has room to borrow more capital; the question is whether it should given the comments above.

More on use of debt financing »

11 – Net Trade Cycle

Managing annual working capital for companies like this shouldn’t be that difficult as the variables are fairly consistent for the most part. The firm knows when and how much money it will collect in fees both monthly and quarterly. The firm can also control to some degree when it pays out monies for operational expenses.

AMG, however, has a spread in its net trade cycle of 12 days – from a low of 35 to a high of 47. Each one of those days is the equivalent of around $6 million, adding up to $72 million sloshing around back and forth in the working capital of the company.

This means that the company can swing from a gain in the net trade cycle from $72 million to up to a loss of cash flow of $72 million. There’s no reason for this and it typically is representative of bad financial management.

More on net trade cycle »

12 – Cost of Capital and EVA

Given that the internal companies cost of capital is only averaging between 6 to 7% annually, it’s hard to believe that the last two years it cannot hurdle or exceed that rate. It is not achieving the required rate of return, hence the stock is lower than it could be.

More on cost of capital »

For company like AMG, one that touts its ability to help outside investors invest their money, it is strange to see these kinds of financial inconsistencies along with an apparent inability to manage their own money.

The post Affiliated Manager’s Group (AMG) Financial Analysis appeared first on The Business Ferret.

From Google Finance

Pricing Policy

Middleby Corp is considered by the financial commentators as a real dedicated cash flow generator. One might question this by looking at the pricing policy. A real cash flow generator does not allow the markup index and, as a result, the gross profit margin to decline continuously for several years!

More about Pricing Policy »

Excess Cash

Holding cash does not make a company a cash flow generator but generating enough cash flow that you have no need for working capital cash absolutely is. Well, that is not the case with Middleby. Actual cash is stable but the working capital cash need is rising directly in lock step with the negative excess cash.

More about Excess Cash »

EBITDA to Actual Cash Flow

Considering just these last two charts and looking at the actual annual cash flow generation in the third chart prove this point.

For the most part, actual cash flow and adjusted cash flow on a debt free basis is basically flat until 2014. During the years prior the annual nominal revenue growth is around 23% but the cash flow is flat and actual non-adjusted cash flow is mostly negative due to investments into other assets.

While investments into other assets may be declared necessary to grow the business these rapid investments need to be growing the cash flows and they are not doing so. In fact, the fixed assets investments directly related to the business was in half from 2013 pace compared to 2014 boosting cash flow and the pace of investing in other assets was cut back further adding to the jump in adjusted cash flow for 2014 yet actual cash flow before financing was still negative.

More about EBITDA to Actual Cash Flow »

The post The Middleby Corporation Financial Analysis appeared first on The Business Ferret.

From Google

The analysis below is from 2012 to 2016 (annualized from June).

1 – Real Revenue Growth

Over the last four years ending 2016, this firm grew revenues at an astounding average of 103% per year. Cold water is thrown on this feat when looking over the same time period and seeing operating expenses (excluding depreciation) skyrocketing at 199% per year on average. How can this end well?

More on real revenue growth »

2 – Sustainable Revenue Growth

The entire amount of annual revenue growth is totally unsustainable. What does that mean? The business cannot operate on its own without substantial and consistent outside debt and equity financing, even though these additional investments will see no economic annual returns for the foreseeable future.

More on sustainable revenue growth »

3 – Pricing Policy

Tesla raised its markup on products after being much too low in 2012 and prior. Since then, they have raised markup to 1.57 times costs of goods sold to revenues from 1.17 in 2012. What could be bad about this progress? Well, the pricing is now almost 25% higher than traditional competitor car manufacturers, which means they are now prone to price competition. And what happens when their aging car styles need overhauling?  

More on pricing policy »

4 – Operating Expense Control

Like I mentioned above, there is little to no control over their operating expenses.

More on operating expense control »

5 – EBITDA to Actual Cash Flow

Tesla is currently at zero EBITDA; using the traditional calculation method it’s actually negative. The actual cash flow before financing is collapsing into a financial Grand Canyon. Even if we ignore the investments into other assets, the cash flow before financing is negative at 50% of annual revenues!

And if those other assets should not be counted in cash flow then what are they worth? This number is currently at $10 billion compared to annual revenues in 2016 at $7 billion.

More on EBITDA »

6 – Debt Free Cash Flow

This chart should scare investors out of their minds. As incremental additional revenues increase rapidly due to the extreme need to increase revenues at all costs, the already incredible negative cash flows disintegrate at a hypersonic rate.

More on debt free cash flow »

7 – Excess Cash

It appears that Tesla has enough cash resources even with all the increasing negative cash flows year by year. But let’s keep something in mind: over the last 4 years the company has brought in additional debt and equity of $20.5 billion. Most of that is not equity; 80% of the amount is additional debt. This is over the same period where the company had total revenues of only $16.3 billion. Is anyone hearing this?

More on excess cash »

8 – Return on Assets (ROA)

All forms of rates of returns on assets are totally and notably negative for each of the last five years. Who would have thought different given the prior comments?

More on return on assets (ROA) »

9 – Working Capital Needs

All that additional investment coming into the company just barely covers its annual working capital needs, which says nothing about the increasing significant needed investments in gross fixed assets.

More on working capital »

10 – Debt Financing

This chart tells the story – enough said.

More on use of debt financing »

11 – Net Trade Cycle

The net trade cycle for the company is a weighted average of 111 days. This means that the company needs around $20 million per day – or $2.2 billion – tied up in working capital all the time. This amount increases with increases in annual revenues if the company makes no significant changes.

More on net trade cycle »

12 – Cost of Capital and EVA

Tesla’s adjusted weighted cost of capital is around 12% annually. It underperforms this cost by a weighted average of negative 4.2%. The cash flow return on assets is a weighted average of negative 42%. And it gets worse than even that. Total assets are three times the amount of annual sales. The company has already dropped off the cliff and is accelerating towards the canyon floor!

More on cost of capital »

The post Tesla Motors Financial Analysis and Health Report appeared first on The Business Ferret.

The charts below illustrate the use, flow, and stimulus to the economy as represented by gross domestic product, or GDP. The tables and charts below show, at different times, the stimulating effect of money supply expansion or contraction by the Federal Reserve and loan expansion or contraction by overall banking system.

In short, we are seeing a muted effect on the US economy due to unnecessary loan restraint by the banking system. Banks held on to an extraordinary percentage of the 2009 stimulus provided by the Federal Reserve as free excess reserve – as much as $2.5 trillion at any given time. Instead of stimulating the economy, the stated goal, these reserves remain with banks as dormant deposits. Releasing this money supply could have a huge positive effect on the economy.

Let’s walk through the numbers. As a note, all of the data used to create the charts below come from the US Department of Commerce and the Federal Reserve.

In 2000, just after the Dot-com bubble, our GDP here in the US was close to $10 trillion. Our M2 money supply – cash, checking deposits, and other highly liquid assets – was about half of that, close to $5 trillion. This put the US at a 2x multiple of GDP to money, meaning that every $1 in our money supply would add $2 to our GDP.

In the same year, our total aggregate debt was $18 trillion (think credit cards, line of credit loans, mortgages, etc.), putting our GDP to debt ratio at 0.55. Put another way, every $2 of debt in this country in the year 2000 would create $1 of GDP.

If you look at the first quarter of 2016, you see a troubling direction for these numbers. GDP is almost double but the M2 money supply is 2.5x larger. That means that our money supply is growing faster than our GDP, dropping our GDP to money supply ratio by almost 30%. Now, each dollar of money supply is only worth $1.50 in GDP (and dropping). In other words, the money that we have to work with is 30% less efficient than it was in 2000.

In the same time period, the aggregate debt has gone up at the same rate as the money supply, outpacing GDP growth. Now, it takes almost $3 in debt to create the same dollar in GDP. Our debt, like our cash, is significantly less efficient. If our cash and debt performance were the same as it was 16 years ago, our GDP would be almost 40% higher, or over $25 trillion.

That’s not great. Despite all of the businesses started and capital invested and innovation generated, our GDP is deleveraging and underperforming. So what gives?

This second chart compares GDP growth to the federal funds rate. The first thing we want to concentrate on is the 3^rd column, or the real GDP annual change (indicated year compared to the previous year). This is actual change modified by inflation to give us the real performance of GDP. Consistency and growth existed until 2008 and 2009 when the most recent financial crisis occurred – the Great Recession. Growth returned, albeit at a slower pace than before.

Now, look at the real federal funds rate. This rate basically sets all other interest rates in the economy and shows whether the Federal Reserve is stimulating the economy or attempting to slow the economy. Currently the Fed is being simulative through low nominal interest rates and negative real interest rates, which are generally highly simulative.

So, overall, the Fed is attempting to stimulate the economy by keeping interest rates low. This should give families, small businesses, and corporations access to debt which can be spent on goods and services, stimulating growth and GDP. But real GDP growth is slower now than any time since 2009. And now the real interest rate is going back up +200% while the economy is still underperforming. This is not a great sign of things to come. The economy is depressed and the Fed is, for all intents and purposes, acting to depress it further.

In 2008, the Fed put forward a massive economic stimulus program to pump trillions of dollars into large financial institutions to keep them from collapsing. The thought behind this was to avoid a recession by securing existing shaky loans and ensuring that responsible lending would continue.

What actually happened? Well, some of that stimulus money went where it needed to go but a huge portion started pooling in excess cash reserves. Compare the 2^nd column with the 3^rd one above. The Federal Reserve is about 3 times the reserves it had in 2000, showing extra caution after the 2008 crisis. But the banking industry? It’s currently holding 1,785 times what it was in the year 2000!

In theory, banks could create at least $6 of loans for every $1 of excess reserves held. In aggregate, this would be the equivalent of almost $14 trillion in additional loans into the economy if the reserves were used.

What’s worse is that lending has actually slowed down. Pre-2008, on average, $2.45 of GDP was created by each additional $1.00 of bank loans. From 2008 on, that ratio is down to $2.17 (average) of GDP per $1 loaned. So not only are they holding on to money that should be loaned out, they’re loaning out at a slower rate than before despite astronomical reserves.

This reserve money is doing nothing productive by sitting around. This could be lent out at the currently very stimulating interest rates for all of the activities that contribute to economic growth.

Stimulus money was given to the banks in 2009 without enforced guidelines for how it needed to be used. Instead of pushing that money back out into the hands of consumers and business owners, the banks, overly fearful of another collapse, held on to trillions of dollars they didn’t need. Now, that money is “theirs” and it sits unused.

So how does this turn around? The fastest route to the growth our GDP needs and should have had to begin with is to force the banks to move this stimulus money out of their coffers in into the money supply.

The post The Ferret vs The US Economy: Our Monthly Economic Report appeared first on The Business Ferret.

How many times have you heard this comment from a seller? Although this might be a common statement from a business seller, is it accurate?

When the owner of a small, privately held business firmly believes that their business is unique, the owner’s ideas about valuation of the business will often be highly flawed.

Whenever a valuation is done there are opposing parties involved. Even when a valuation is done for internal purposes, there will be the “too high” and “too low”camps when the valuation number is announced. Keeping this concept in mind will help the recipient of the valuation a more balanced perspective.

In reality, small businesses, even within the same industry, are unique due to the unique personalities of their owners. In small businesses, defined here as one with under $5 million of annual revenue, the owner’s personality permeates every aspect of the business operation – whether for good or bad.

We do not accept owner valuations with cars or houses when we buy and sell – why would it be any different in buying or selling a business? You need a independent, professional business valuation if you’re buying or selling a firm.

What Determines Business Value?

Like a car or a house, a business has many parts that come to bear on the ultimate value. Cars and houses are much more actively compared and researched, in part thanks to the internet. The public at large is fairly competent at shopping the correct value of a car or house within a tight range. The narrowing of that price down to an exact price or value is where negotiation plays a part. But what about the pricing of a business?

For publicly traded businesses, about 17,000, there is and has been an active daily trading market for the stock (equity) and bonds (debt) of these companies. Although the trading of the stock is on a minority basis (non-controlling interest), it does establish value ranges for a company.  A full buy-out of the controlling interest requires negotiation on a majority basis (or company controlling interest) which generally results in a premium value above the previous stock market value (on minority basis trading).

But what about the 20+ million privately held or controlled businesses?

This is where a valuation comes into play. Many businesses are bought or sold without an independent review of value. This approach may save money in the short term, but can be damaging and costly to the buyer or seller in the intermediate or long term.

Why Are Valuations Avoided?

If an independent valuation of a business should be a part of the sales process, why is not always done?  Typically, uncertainty and cost come into play.

1. First, it is never certain that a deal will go through. If a deal does not close, the whole process of a finding a selling candidate begins again. Clearly this is a time-consuming and costly process.
2. Second, the valuation of a business is not inexpensive process, ranging generally from a low of $7,500 to over $50,000 for larger valuation engagements. This cost, coupled with the uncertainty of a successfully completed transaction, is indeed quite a financial hurdle.

When Do You Need a Valuation?

• You are doing strategic planning and want an independent valuation of the business in order to measure progress or a starting point – you need a valuation.
• You are buying a business and need bank financing – you probably need a valuation.
• You are involved in a large multi-partner buy-sell agreement – you definitely should consider a valuation.
• Your buy-sell agreement calls for a valuation to be done after a trigger event – you know it – you need a valuation.
• You are bringing in new partner to a firm who will buy in – someone needs a valuation.
• You are doing a merger or acquisition – you might need a valuation.
• You require the determination of intellectual value of a firm’s specific assets – you absolutely need a valuation.
• You are working on minimizing estate and gift taxes – you better believe it – you have to have a valuation.
• You are concerned about your family limited partnerships and the discounts applied – you need a valuation.
• You are changing from a C corporation to a Sub-S corporation – you probably require a valuation.
• You are thinking that times need a changing and you are getting a divorce – someone will want a valuation.
• You are doing an ESOP – you will need a valuation every year of its existence.
• You are tied up in a breach of contract, insurance claim, condemnation, or some other type of litigation – you will probably need a valuation.

Just because you run a business does not qualify you as a financial expert, and certainly not as a business valuation expert. I know how to drive a car, but that does not make me an auto mechanic. Protect yourself and your investment; always get an independent business valuation!

The post Would You Accept a Self Valuation of a Business? appeared first on The Business Ferret.

While never a great measure of good financial practices, their stock price has seen better days. It spiked to almost $74 in 2007 but fell dramatically right after and has stayed generally flat around $35 ever since.

But we’re not here to talk about the stock price, we’re here to show what’s behind the financial management.

Granite Construction Revenue

For Granite Construction the revenue picture is all over the map – up and down year-by-year but generally downward. This is a picture of a company who goes after any and all revenue channels to hit a dollar target.

This kind of wild fluctuation might be excusable in a less stable industry but, with the economy improving as it has been, a company building infrastructure should be setting and hitting clear targets year over year. Granite’s annual revenue rollercoaster shows there is something amiss.

Here, we see revenue sustainability based on price adjusted revenue growth generally unsustainable throughout this period with wide variations. variations. This contributes even more to an apparently uncontrollable financial situation.

Erratic, unsustainable annual revenues are typical of construction companies – both big and small – resulting in similar and ongoing financial issues consistently sees in this industry.

Granite Construction Pricing Policy

With declining revenues, the company is forced into a pricing policy that appears totally reactive and random. Instead of introducing better finance strategies, Granite is reacting year after year with pricing changes that threaten to throw them even further off the track.

EBITDA to Cash Flow

The net result of this wild variation is cash flow crashing from an already low amount relative to revenues, then going negative. This negative cash flow adds to the unsustainability of annual revenue growth, making matters worse. It is also increasing net trade days, constraining cash flow even further.

It does not have to be this way but we’ve seen many construction companies run into this same dangerous financial scenario. Our recommendation? Stabilize the revenues, fix the pricing policy, and then work on the working capital issue. Your business depends on it. 

The post Granite Construction Financial Analysis appeared first on The Business Ferret.

But even the most creative companies need to manage their finances in a way that will keep them growing and experimenting with new sales strategies. We wanted to see if the numbers behind this fast food giant support all the great financial press we’ve seen lately.

We were not disappointed.

Domino’s Pizza Pricing Policy

Domino’s Pizza is characterized by financial pundits as a highly profitable company in the fast food industry and we agree. Domino’s is one of the most profitable firms we’ve seen. Their stellar performance is largely due to the firm’s courage to raise prices even when revenues were declining in 2012. Even when revenues began to rise, the company continued to raise prices prices. You can see in 2014 the price increases stopped and, unsurprisingly, the cash flow growth slowed in turn. Keep the cash flowing, Domino’s!

EBITDA for Domino’s

Net income goes up and so does cash flow. Domino’s works to keep the revenue growth rate in line with working capital needs hence increasing cash flows. This is the kind of chart we like to see for all companies, regardless of industry.

Take a second to compare this chart with the pricing policy one above. From 2011 to 2014, GP markup (a function of pricing) went up overall, as did sales growth. Many businesses are fearful of raising prices because they see their customers fleeing to cheaper options. Even in a highly competitive industry with minimal differentiation, Domino’s increased their GP margin while enjoying higher sales. The perfect combination!

Domino’s Pizza Net Trade Cycle

With the exception of 2014, the company has kept their working capital needs to a manageable 11 net trade cycle days. This means that the company turns their cash cycle in 11 days. The more stable this relationship is the more the company can successfully plan revenue increases while still producing solid cash flow.

The two day bump in net trade cycle days in 2014 means that the company needed to invest $11,000,000 back into the working capital cycle, eating up cash and cash flow. Eat pizza, Domino’s, not your cash flow. You know better!

The post Domino’s Pizza Financial Analysis appeared first on The Business Ferret.

The stock price chart below (from Google Finance, COH) shows the roller-coaster this stock has been in the last 10 years. In our analysis below, we’re going to concentrate on the last 4 years or so and see what went wrong and what corrections we recommend.

Pricing Policy

A strong brand like Coach should be able to maintain its gross profit margin at all times. People pay more for brand recognition, that’s been true for as long as we’ve had luxury consumer goods to purchase. Traditionally, Coach has done well with this but in 2013 and the the first half of 2014 the gross profit margins dropped significantly. This is unfortunate and the first thing that a company like Coach can and should fix but this has yet to happen. In fiscal year 2012, Coach’s gross profit margin was 72.8% but now is at 68.9% a decline of 5.4% and a cost of almost $200,000,000 for the fiscal year 2015 ending in June.

Operating Expense Control

Overall, annual revenues for Coach are increasing at a paltry 2% but the costs of goods sold and the operating expenses are both increasing at around 6% annually. This causes net operating income growth to fall off. First, the company needs to raise its prices around 6% across the board in aggregate to fix the gross profit margin,then they need to tackle the operating expenses. This does not necessarily mean cutting workforce; even holding the line on increases for the next year would be a real benefit, although difficult to accomplish. Why cause further turmoil cutting trained, experienced employees that you need in the future?

Excess Cash

Coach holds too much cash and other assets that are inefficient and costly. Coach holds up to $1 billion in excess cash, which is not necessary for the working capital operations of the business. A line of credit or even one third this amount could be held for working capital operations if the company wants to be fiscally conservative.

The company also holds around $1 billion of other assets that are financially unnecessary for the operation of the business. Excess cash and other assets drive up the costs of capital and lowers the rate of return on assets (where excess cash and other assets reside). Coach has a costly and straightforward problem that can be addressed for a very positive overall outcome. This is Coach, afterall!

EBITDA to Actual Cash Flow

Coach does, fundamentally, know how to manage its balance sheet to maintain its cash flow before financing. With a stumble in 2013 the company has maintained its cash flow at around $850 million per year. Excellent control and financial management and all the reason more to wonder why the Coach is having the issues we identified above. That said, this is also the reason we believe that the company can handle and change these issues soon to the company’s benefit.

The post Coach, Inc Financial Analysis: Room for Improvement appeared first on The Business Ferret.

Willamette Valley is not only one of the smallest publicly traded companies but it is a rarity on the stock market: a wine producer and distributor. This type of business is typically too small to be publicly traded, primarily due to the costs of SEC regulations. We thought it would be interesting to see what a company of this size in this industry looked like under the hood.

Their stock price (Google Finance chart shown above) has had its ups and downs over the years, and is currently sitting close to their IPO price. Not coincidentally, their financial performance has also been all over the map. WVVI has historically tried to increase wine sales by lowering prices and they have been slowly dying financially because of it. Not enough cash flow to sustain the operations equates to a slow bleed-out.

In 2010, we would have recommended they stop seeking revenues and start focusing on gross profit margins and gross profit dollars – increase prices and do it now! Over the next 3 years, prices increased, gross profit margin increased by almost 1/3, and the annual revenues declined 24%. These changes made sure the business stayed healthy during a time that could have really hurt their future prospects.

WVVI was never this good at raising gross profit margin, let alone maintaining a steady gross profit margin but in the last several years they have done a superb job of this. As a result, the company has higher net income and cash flow to show as the result while sales have actually declined 20% over the last several years.

WVVI has produced increasing net operating income while sales and operating expenses have declined. The gross profit dollar growth has remained flat even though the annual sales have declined due to increasing gross profit margins offsetting the sales decline. Over this period, operating expenses were reduced by 1/3, helping their margins even more.

This is a company that truly is working harder for more money – not less – and it shows. While we would not recommend the wine industry as a great way to make money, clearly WVVI gets it and we wish them the best in the new year!

The post Willamette Valley Vineyards (WVVI) Is Doing It Right appeared first on The Business Ferret.

But I believe strongly in human creativity. So I just went back three years in the new items I compile and send out (they go back to 1994) and pulled out all the positive and interesting facts.

Most of the facts are about the U.S. and not about politics or making money. All of these facts will positively and greatly change our lives for the better in the near future.

I hope you enjoy reading them as much as I enjoyed putting them together!

Transportation

 Supercapacitors in Cars

The Economist – July 12, 2014

[…] vehicles, such as Tesla’s Model S and BMW’s new i8, were powered by lithium-ion batteries, sometimes backed up by a petrol-driven engine that drives a generator and may, in a hybrid arrangement, also drive the wheels directly. One, however, was not like this. For instead of batteries, the Toyota TS040 hybrid (pictured above) has a super capacitor. When the car needs a kick that its 520 horsepower 3.7 liter V8 petrol engine cannot provide, an additional 480 horsepower is available from two electric motors connected to this super capacitor. And when the car is decelerating or braking, the motors work in reverse, as generators, to charge the supercapacitor up again.

Unlike batteries, which store energy chemically in the material of their electrodes, a capacitor stores energy physically, on the electrodes’ surfaces. One electrode has a surplus of electrons and the other a deficit. If the electrodes are then connected through an external circuit a current flows until the surplus has neutralized the deficit and both have the same electrical potential. Electrode surfaces are easy to get to, so a capacitor can be charged and discharged quickly, giving it a high power-density. But surfaces cannot hold as much energy as entire volumes, so capacitors have lower energy-densities than batteries.

Super capacitors pack vastly larger surfaces into a given space by using porous materials to form the electrodes. This permits them to have an energy-density up to 10,000 times that of a regular capacitor. That is still only a tenth of a lithium-ion battery’s energy-density, but a supercapacitor power-density can be ten times that of such a battery.

Better Transportation – The Public Speaks

The Week – June 13, 2014

WashingtonPost.com – According to numbers released by Uber, full-time drivers of the smartphone-summoned UberX taxis in New York City earn a median annual income of $90,766. That’s three times the estimated yearly wage of a traditional cabbie.

Public transit ridership rises

The Week – March 21, 2014

USA Today – Use of public transit in the U.S. rose to its highest level in more than 50 years last year, as more and more Americans opt for buses, trains, and subways instead of driving. Since 1995, public transit ridership has increased by 37 percent—outpacing the 20 percent population growth over the same period.

Rebirth of the Diesel Engine – Look Out
Tesla!

The Economist – September 7, 2013

Tesla Motors has had great success with its Model S luxury electric car, which has outsold its petrol-powered equivalents since being launched in America last year. Even so, the prospects for battery-powered vehicles generally may never shine quite as bright again. Having had their day in the sun, they may soon be eclipsed by, wait for it, the diesel engine.

[…]

With its old 1.4-litre diesel engine, the Volkswagen Polo currently holds the record for being the most frugal non-electric car in Europe, with a fuel economy on the combined cycle of just 3.8 liters/100km (equivalent to 61.9 miles per American gallon). The Toyota Prius hybrid? A lowly 20th in the league table of the most economical fuel-sippers, with 4.2 liters/100km, along with higher emissions of carbon dioxide. The 19 cars having better fuel economy than the Prius hybrid are all clean diesels.

Your columnist fully expects the new generation of clean, low-compression diesels to improve fuel-economy by a further 20% or more. That will put diesels on much the same footing—given the way that equivalent miles-per-gallon are calculated for electric vehicles—as many battery-powered vehicles, but without any worries about range or recharging. Roll on the day.

Silica extracted from rice husks makes for greener tires

The Economist – January 5th, 2013

One good way to save fuel is to reduce rolling resistance, which is caused, in part, by a vehicle’s weight repeatedly squashing its tires. As the tires bounce they convert kinetic energy into heat, thus wasting it. Hysteresis loss, as this is known, can be reduced by mixing a tire’s rubber with powdered material that has strong chemical bonds in it.

In the past, the material of choice has been carbon black, a sooty substance made by the incomplete combustion of petroleum products. More recently, silica (silicon dioxide, which comes from sand) has come to the forefront. Silica is better because it lowers hysteresis loss without reducing a tire’s grip. It thus cuts rolling resistance by around 30%, compared with its predecessor. That translates into a 5-7% reduction in fuel consumption. And silica also increases a tire’s wet grip.

Sand is cheap. But processing it into something suitable for use in tires requires effort and money. So if nature were to provide grains of silica suitable for use without processing, that would be a bonus. And nature does. Grasses contain tiny pieces of silica, called phytoliths (illustrated above), whose job is to discourage herbivores, both vertebrate and insect. Pirelli’s engineers realized that these defensive weapons are the ideal size to add to tyres in order to control hysteresis loss, and that a ready supply of them is available in the husks left over from the milling of rice.

Rice husks were once waste. These days they have some value because they are used as fuel in small-scale electricity generators. But from Pirelli’s point of view, that is a good thing, because what the firm is interested in is the phytoliths left behind in the ash—and until now the ash itself really was waste. The firm has set up a factory in Meleiro, a town in a rice-growing area of southern Brazil, to extract phytoliths and put them in tires. The ash comes from rice husks burned to help power the factory. A ton of rice produces around 200kg of husks and those, in turn, yield 40kg of silica. According to Daniele Lorenzetti, who is in charge of the project, by 2015 the factory will be providing nearly a third of the silica Pirelli needs for the 400,000 tonnes of tires it makes in Brazil. The technology could spread fast, especially in other rice-growing areas. For Brazilians that would have a delicious irony. The Amazon rainforest was the original home of rubber trees, but Brazil’s rubber industry was devastated when seeds smuggled to Asia were used to set up rival plantations. By taking an Asian crop and using it to make better tires, they will be getting their own back.

Driverless cars: Look, no hands

The Economist – April 20th, 2013

IN AN average month 108,000 people are killed in traffic accidents around the world, and the death toll is increasing. On current trends it will exceed 150,000 people a month by 2020, according to the World Health Organisation, as cars become more widespread in developing countries, increasing the number of vehicles on the world’s roads from around 1 billion in 2010 to 2 billion. Many lives will be spared by outfitting more vehicles with airbags, the biggest lifesavers in car technology since seat belts. But now a far greater revolution in road safety is within reach. Around 90% of accidents are caused by human error. Design vehicles so that they can drive themselves, goes the theory, and death tolls will plummet.

Japan’s bullet train vs budget

The Economist – April 28, 2012

The world’s busiest train route, and one of the busiest air routes, is between Tokyo and Osaka, Japan’s two biggest metropolitan areas. On that corridor, the shinkansen, as Japan’s bullet trains are known, were born in 1964. They whizz 120,000 passengers a day smoothly from one place to another, on trains that leave every ten minutes. Although humans, not robots, are at the controls, the average delay is a miraculous 36 seconds. To take all those passengers by air would require 667 aircraft, each with 180 seats, or five times Japan’s fleet of Boeing 737s, estimates Macquarie, an investment bank.

Energy

How to gather more light for solar power

The Economist – June 28, 2014

THE sun provides enough energy in an hour to meet the world’s demands for a year, yet solar energy accounts for barely 1% of global power consumption. Plenty of researchers are working on making solar cells turn sunlight into electricity more efficiently. Some, though, are trying instead to turn it into fuel, using so-called photo electrochemical (PEC) cells. Unfortunately, most processes designed to do this have proved complex and inefficient. But Florent Boudoire and Artur Braun of the Swiss Federal Laboratories for Materials Science and Technology think they have found a way to improve things.

The PEC cells which Mr. Boudoire and Dr. Braun are interested in use sunlight to split water into hydrogen and oxygen. They do this by employing a photo electrode to convert the light into electricity and thus create a circuit that runs through the water. The gases are then generated by electrolysis.

[…]

Curiously, the researchers found after they had finished their experiments that nature had beaten them to it. The microstructure of their cells, with its spherical light collectors, resembles what goes on inside a moth’s eyes. These, which have evolved the ability to collect as much light as possible in order to see in the dark, and to reflect as little of it as possible to avoid being detected by predators, also contain tiny light-absorbing spheres. Nothing under the sun, as it were, is new.

Asgard’s Fire – Thorium Reactors

The Economist – April 12, 2014

Existing reactors use uranium or plutonium—the stuff of bombs. Uranium reactors need the same fuel-enrichment technology that bomb-makers employ, and can thus give cover for clandestine weapons programmes. Plutonium is made from unenriched uranium in reactors whose purpose can easily be switched to bomb-making. Thorium, though, is hard to turn into a bomb; not impossible, but sufficiently uninviting a prospect that America axed thorium research in the 1970s. It is also three or four times as abundant as uranium. In a world where nuclear energy was a primary goal of research, rather than a military spin-off, it would certainly look worthy of investigation. And it is, indeed, being investigated.

One of the cleverest things about LFTRs is that they work at atmospheric pressure. This changes the economics of nuclear power. In a light-water reactor, the type most commonly deployed at the moment, the cooling water is under extremely high pressure. As a consequence, light-water reactors need to be sheathed in steel pressure vessels and housed in fortress-like containment buildings in case their cooling systems fail and radioactive steam is released. An LFTR needs none of these.

Thorium is also easier to prepare than its rivals […]

It does, it is true, need a seed of uranium or plutonium to provide neutrons to start the ball rolling. Once enough of it has been converted into ²³³U, though, the process becomes self-sustaining … The consequence is that thorium reactors can run non-stop for years, unlike light-water reactors. These have to be shut down every 18 months to replace batches of fuel rods.

Thorium has other advantages, too. Even the waste products of LFTRs are less hazardous than those of a light-water reactor. There is less than a hundredth of the quantity and its radioactivity falls to safe levels within centuries, instead of the tens of millennia for light-water waste.

Moore’s Law Revisited

The Economist – March 28th, 2014

The rate of shrinkage has followed Moore’s law, an observation made in 1965 by Gordon Moore, one of Intel’s founders, that the number of transistors that can be crammed into a given area doubles every couple of years. One way to view that is to examine the cost of transistors. In 1982, when Intel launched its 80386 chip, $1 bought several thousand transistors. By 2002, you could get 2.6m for the same price. By 2012, when chips routinely sported more than a billion transistors, the price had fallen to 20m to the dollar.

The Electromagnetic Catapult

The Economist – March 8th, 2014

The US Navy’s railgun program, aptly named Velocitas Eradico—“I Who Am Speed, Destroy” in Latin—has made brisk progress since it began in 2005. Working primarily with General Atomics and Britain’s BAE Systems, the muzzle energy of shots has increased from six to 32 mega joules, enough to hammer targets beyond 160km (99 miles) at more than five times the speed of sound (sound travels at about 1,230kph), reckons Nevin Carr, a retired rear-admiral and former head of America’s Office of Naval Research.

The slugs can be heavy. General Atomics has produced a rail gun able to hurl a 10kg projectile more than 200km in less than six minutes (that’s 2,000kph). Some slugs fly fast enough to hit a target 30km away with a straight trajectory, says John Finkenaur, a rail gun expert at Raytheon, another defense contractor. Slugs are cheaper than missiles and, lacking propellant and explosives, are safer to store.

Rail guns, though, can be awkward. They get hot and wear rapidly. Some rail guns had to be dismantled after two or three shots to make sure components were holding up. Now some can handle 100 shots and computer models suggest this might be multiplied six fold, giving rail gun barrels roughly the same lifespan as five-inch naval guns, says Mr. Carr.

[…]

HyperV is, though, making progress with another exotic rail gun. Rather than use metal as an armature, the firm strips ions from a few milligrams of argon gas and uses the resulting conductive plasma to transfer electrical energy from one rail to another. In a vacuum it can fire a plasma blob at nearly 150km a second—fast enough to initiate fusion in a deuterium and tritium fuel. HyperV hopes to use it to design the world’s first commercially viable, power-generating fusion reactor.

… More prosaically, IAP Research, a technology-development company based in Dayton, Ohio, has come up with something for the handyman. With funding from a toolmaker it has produced a prototype electromagnetic gun that drives nails into concrete. Dave Bauer, the firm’s founder, expects it to be in hardware stores within a couple of years.

Energy Bonanza in the U.S.

The Economist – March 16th, 2013

Cheap gas is also translating into cheap electricity, since America’s marginal power supplies tend to come from gas-fired plants. In 2011, according to the IEA, American factories paid roughly half the going rate for electricity in Chile or Mexico and a quarter of the eye-watering Italian price. In New York last year prices were the lowest they have ever been since the state introduced a competitive wholesale market in 1999.

Better still, the steep drop in the price of natural gas has driven America’s drillers to hunt for oil instead. Rigs are migrating from gassy places like the Haynesville Shale, in Louisiana, to spots where oil is trapped in tiny rock pores, such as the Permian Basin and Eagle Ford Shale in Texas, the Bakken formation of North Dakota and the Mississippian Lime, which sits astride the border between Oklahoma and Kansas. Applying the same techniques to such “tight oil” as to gas-laden shales, they have managed to increase America’s oil production by a third over the past four years, to 7m b/d. The government expects it to grow by more than 1m b/d over the next two years. The output of the Bakken Shale alone has risen from 100,000 b/d in 2008 to over 700,000 now.
By the end of this year, BP predicts, America will overtake Russia and Saudi Arabia to become the world’s biggest producer of liquid fuel, meaning oil and biofuels.

Despite its huge local impact, America’s shale-oil boom has pushed up global oil production by just a percentage point or two, not enough to reduce the price much. However, it has resulted in a big drop in America’s import bill. IHS calculates that unconventional oil reduced the trade deficit in 2012 by $70 billion, or about 10%.

Sunny Uplands – Solar energy is really coming

The Economist  – November 21st, 2012

Moore’s law suggests that the size of transistors (and also their cost) halves every 18 months or so. Swanson’s law, named after Richard Swanson, the founder of SunPower, a big American solar-cell manufacturer, suggests that the cost of the photovoltaic cells needed to generate solar power falls by 20% with each doubling of global manufacturing capacity. The upshot (see chart) is that the modules used to make solar-power plants now cost less than a dollar per watt of capacity. Power-station construction costs can add $4 to that, but these, too, are falling as builders work out how to do the job better. And running a solar power station is cheap because the fuel is free.

Coal-fired plants, for comparison, cost about $3 a watt to build in the United States, and natural-gas plants cost $1. But that is before the fuel to run them is bought. In sunny regions such as California, then, photovoltaic power could already compete without subsidy with the more expensive parts of the traditional power market, such as the natural-gas-fired “peaker” plants kept on stand-by to meet surges in demand. Moreover, technological developments that have been proved in the laboratory but have not yet moved into the factory mean Swanson’s law still has many years to run.

Comparing the cost of wind and solar power with that of coal- and gas-fired electricity generation is more than just a matter of comparing the costs of the plant and the fuel, of course. Reliability of supply is a crucial factor, for the sun does not always shine and the wind does not always blow. But the problem of reliability is the subject of intensive research. Many organizations, both academic and commercial, are working on ways to store electricity when it is in surplus, so that it can be used when it is scarce.

[…]

One consequence of all this progress is that subsidies for wind and solar power have fallen over recent years. In 2013, they will fall further. Though subsidies will not disappear entirely, the so-called alternatives will be seen to stand on their own feet in a way that was not true in the past. That will give them political clout and lead to questions about the subventions which more traditional forms of power generation enjoy (coal production, for example, is heavily subsidised in parts of Europe).

America’s Gas Energy Future

The Week – September 7th, 2012

The primary driver of America’s energy revolution was the controversial new technology of hydraulic fracturing or fracking. In 2005, the Bush administration loosened environmental rules and offered tax breaks to encourage the use of the technique on deposits of oil and gas in the U.S. Today more than 35,000 tracking wells produce nearly a third of the natural gas Americans consume. Oil production from shale is also booming and there might be more than 1 trillion barrels of recoverable oil in these deposits – 4 times Saudi Arabia’s proven oil reserves. North Dakota in particular is benefiting from this new oil boom. In the future years, the U.S.’s dependence on foreign oil will continue to shrink though not end. A recent federal report predicted that foreign oil will decline to 38% of the country’s oil consumption by 2022. U.S. oil production now at 5.7 million barrels a day could hit 10 million barrels by 2022 about the same amount that Saudi Arabia produces now.

Solar power in India: Waiting for the sun

The Economist – April 28, 2012

Environment, Water, and Nature

Freshwater under the ocean

The Week – December 27th, 2013

Vast reserves of freshwater have been discovered beneath the seabed of continental shelves off Australia, China, North America, and South Africa—a potentially valuable resource for coastal cities needing to alleviate water shortages or combat drought. The finding comes from a new analysis of seafloor water studies conducted for oil and gas exploration purposes. The total volume of these untapped reserves is estimated at 120,000 cubic miles, “a hundred times greater than the amount we’ve extracted from the earth’s subsurface in the past century since 1900,” Australian hydro geologist Vincent Post tells ScienceDaily.com.The reserves were formed hundreds of thousands of years ago, when sea levels were much lower and much of the ocean floor was dry land. Rainwater seeped into the ground and filled up the water table, which was later sealed off by protective layers of clay and sediment and covered as the oceans rose. Scientists say that the water could be tapped by drilling and that its salinity is low enough that it could be converted readily into potable water. By 2025 two thirds of the world’s population will no longer have a secure water supply, according to the United Nations.

Earth’s Oldest Water

The Week – May 29, 2013

At the bottom of a gold mine a mile and a half deep, Canadian researchers have discovered a cache of ancient water that has been sealed off from the rest of the world for as long as 2.6 billion years. The water originated in a prehistoric sea at a time when the earliest single-celled organisms were evolving, the Toronto Globe and Mail reports, and its existence raises hopes that similar stores of water could exist deep below the surface of Mars. The sample contains substantial amounts of hydrogen, which might have served as a chemical fuel that could have allowed bacteria to survive for several billion years without sunlight or oxygen.

Cleaning Up Fracking’s Dirty Water

Barron’s – April 27th, 2013

As much as 140 billion gallons of water are used in the 35,000 wells fracked annually in the U.S. Most of it simply disappears underground; the rest is rendered so toxic by the process that communities are wary of fracking.

140,000,000,000 gallons is equivalent to 430,000 of water. There are 325,853 gallons of water per acre foot. We then need to convert the acre feet into square footage. One acre foot is the equivalent of 43,560 ft.². So this equals 18,730,800 ft.². Converting that the square miles one would divide by 27,878,400 ft.² to equal a square-mile. After all those calculations we have 672 mi.² about half the size of our smallest state, Rhode Island. That is the equivalent of one 10
^th of one percent of the annual US water usage. U.S. daily total water usage based on 2000 date is 408 billion gallons per day.

Black Carbon Soot – the Silver Lining

The Economist – January 19th, 2013

[This study] found that the black carbon around at the moment has a warming effect of about 1.1 watts per square metre of the Earth’s surface (W/m²). This is greater than that of methane and second only to the 1.7W/m² of carbon dioxide. An earlier estimate by the United Nations Environment Programme (UNEP) put the black-carbon effect at only 0.3-0.6W/m². The higher the figure, the worse the warming.

The biggest impact of soot, though, is not on the climate but on health—through lung and other diseases. The UNEP study reckoned that controlling emissions of black carbon could save 2.4m lives a year, regardless of any effects on the climate. It might seem that the new study is one more item of bad environmental news. Not so. It should be easier to deal with black carbon than with carbon dioxide. Whereas CO₂ is long-lasting and an inevitable by-product of burning fossil fuels, soot drops out of the atmosphere within weeks. Stop putting it there and it will rapidly go away—a potentially easy win. That win is made easier still by the fact that about 70% of emissions in Europe and the Americas come from diesel engines. Better exhausts, to trap carbon particles before they are emitted, and the scrapping of old, highly polluting vehicles could make an immediate impact.

Dealing with them is also cheaper than cutting CO2 emissions and does not need global agreement, because the local benefits would be the main point, so no one could free-ride on the emission-cutting efforts of others. Instead, the good of the climate would be free-riding on local self-interest. Piers Forster of Leeds University, in England, one of the study’s authors, argues that if people did everything they could to reduce black-carbon emissions, it would strip half a degree of temperature rise out of the process of global warming—or, to put it another way, would give politicians two extra decades to tackle the less tractable question of what to do about CO2.

Carbon emissions fall

The Week – January 18, 2013

Reason.com – Carbon emissions from U.S. power plants were 12 percent lower in 2012 than at their peak in 2007, even though the economy is now larger. Emissions last year were about the same as they were in 1995, largely because cheaper domestic natural gas has supplanted dirtier coal in power plants.

Why firms go green

The Economist – November 12th, 2011

According to the Carbon Disclosure Project (CDP), a watchdog that collects information on the emissions of over 500 large companies, 59% of emissions-reducing investments made so far—mostly in energy efficiency or renewable energy—will pay for themselves within three years.

Clean power: Back to basics

The Economist – October 22nd, 2011

For many years energy efficiency was the poor relation to cutting-edge clean technology initiatives like wind and solar. But now the more workaday strategies are getting a new look-in. Efficiency measures can often save as much power as the more glamorous efforts can produce, at a fraction of the cost. One widely used estimate comes from a 2009 report from McKinsey, which reckoned that America could reduce its non-transport energy consumption by roughly 23% by 2020 through efficiency savings alone.

Yes, There is Gold in the Ocean

NOAA – November 17th, 2011

Ocean waters do hold gold – nearly 20 million tons of it. However, if you were hoping make your fortune mining the sea, consider this: Gold in the ocean is so dilute that its concentration is on the order of parts per trillion. Each liter of seawater contains, on average, about 13 billionths of a gram of gold. That would be worth nearly $64 trillion in today’s prices making desalination and interesting new venture if done right and economically!

How fracking worked better than Kyoto

The Week – September 28th, 2011

Bjorn Lomborg, Slate.com – “Something amazing has happened,” said Bjorn Lomborg. This year, “carbon-dioxide emissions in the U.S. have dropped to their lowest level in 20 years”—down 14 percent from their peak in 2007. What wonderful “green” initiative is responsible for this dramatic turnaround? Fracking. Thanks to the natural gas boom created by drilling into shale formations, the U.S. has cut way back on its use of coal to generate electricity, and shifted to gas, which emits 45 percent less CO2. As a result, the nation’s CO2 emissions dropped by 500 megatons per year—about twice the total impact of the Kyoto Protocol on emissions throughout the rest of the world. By comparison, government investments in “renewables” like wind, solar, and ethanol have produced far less reduction in emissions. This breakthrough couldn’t have happened without decades of government-sponsored research into fracking technology. The lesson: To combat climate change, our best bet is “energy innovation” that will create new sources of energy—not artificial caps on emissions that haven’t worked anyway.

Buffalo are coming back to the American prairie

The Economist – March 17th, 2012

Before Europeans arrived in North America as many as 60m buffalo are estimated to have ranged across the Great Plains. From around 1830, however, they were systematically killed until only a handful remained. Buffalo were taken for their hides, or simply because they were getting in the way of settlers. Men like Buffalo Bill slaughtered thousands. In only 14 years from now, thanks largely to the buffalo’s natural fecundity; APR will have over 5,000 buffalo, the largest conservation herd on the planet.

U.S. slashes carbon dioxide emissions

The Week – June 8th, 2012

The U.S. has slashed its carbon dioxide emissions from energy generation by 7.7 percent, or 450 million tons, since 2006, more than any other country. The International Energy Agency attributes the drop to the shift from coal to natural gas, driven by the U.S. shale gas boom. Financial Times

Secrets of ancient bacteria

The Week – June 8th, 2012

Since the time of the dinosaurs, a hardy strain of bacteria has been living deep in the barren seabed without access to sunlight, oxygen, or nutrients. Researchers found the still unnamed organisms in clay samples from 100 feet below the seafloor of the North Pacific Gyre, an area where so few nutrients reach the bottom that it takes millions of years to create a thin layer of sediment. Having received almost nothing new to eat since the Cretaceous period, the bacteria are consuming ancient stores of oxygen at a metabolic rate some 2 million times slower than that of humans. “They left the surface 86 million years ago with one lunch box, and they’re still eating out of it,” study author Hans Roy, of Aarhus University in Denmark, tells NPR.org. “It’s like they’re splitting a pie, and they keep splitting in half and in half and in half, but nobody ever eats the last crumble.” The unlikely survival of the bacteria suggests that similar forms of life might be able to exist in harsh habitats on other planets.

Californian water technology: Salty and getting fresh

The Economist – March 31st, 2012

The first part, conservation, is hardly controversial any more. San Diego today uses less water with a larger population than it did in 1989, the year water consumption peaked. The second part, water recycling, has been a harder sell, because of what the industry calls the yuck factor. It doesn’t help that Americans still use the term “toilet-to-tap” for recycling, even though properly treated sewage is nowadays completely clean. Singapore made its program acceptable in part by rebranding it as NEWater. But even the Singaporeans cannot recycle all their waste-water.

This is where desalination comes in. A firm appropriately called Poseidon Resources is now close to building the biggest desalination plant in America behind a power station by the beach in Carlsbad. The power plant sucks in 304m gallons of seawater a day for cooling in any case, so Poseidon plans to divert 104m gallons a day through its osmotic membranes.

Fondling a pipe of membranes (they are rolled like toilet paper but the size of a cannon), Poseidon’s Peter MacLaggan explains the scale: if water molecules were blown up to the size of tennis balls, salt molecules would be softballs (roughly 50% bigger in diameter), viruses would be trucks, and bacteria would be the size of power plants. From the 104m daily gallons, 50m gallons of pure H2O will come out at one end and brine at the other, to be fed back into the power station’s discharge, and then into the ocean.

Economy and Work

Thinking From Home

The Week – May 9, 2014

The Wall Street Journal – Just 10% of workers say they do their best thinking in the office, while 39% say they do their best thinking at home.

Helping the Poor Does Not Cause Laziness

The Week – March 28, 2014

Brazil has reduced the number of its citizens living in extreme poverty by 89 percent in just one decade, the government announced this week at a World Bank forum. Brazil’s aid program, known as Bolsa Familia, is an income-transfer plan that ensures all families receive a minimum of $30 per person per month. First implemented a decade ago, it now reaches nearly 50 million people, or one in four Brazilians. Social Development Minister Tereza Campello said critics who feared that the aid would encourage welfare dependency had been proved wrong. Some 70 percent of recipients are employed, she said, which is about the same as the proportion of no recipients who work.

Selling Stakes in Students’ Futures

The Economist – June 15, 2013

The notion of “human-capital contracts”—or “social financial agreements”, as Oren Bass, a co-founder of Pave, prefers to call them—may seem creepy. To many, it sounds like indentured servitude. But the notion of acquiring a stake in someone’s future earnings is not unprecedented. In professional poker, for instance, players often raise money from investors who then pocket a chunk of any winnings.

Pave and Upstart have developed offerings that are a mix of LinkedIn, a social network for businesspeople, and Kickstarter, a popular crowd funding site that lets folk invest in new products. Candidates post gushing profiles of themselves and describe what they intend to do with the money they are after. Potential investors, who also post profiles, offer cash to individuals who catch their eye. If they invest, the backers receive a percentage of the person’s pre-tax income over a number of years. Pave and Upstart allow youngsters to choose the percentage of their income to share with investors. In return, the matchmakers pocket a sliver of the money raised, as well as a management fee from investors. Pave lets its “prospects” share up to 10% of their future earnings. Upstarts can offer up to 7% of their income. Upstart also caps total payback at five times the amount raised, so that if someone creates the next Google they don’t have to hand over Croesus-like sums of money to their investors.

Global Poverty Rate cut in Half

The Week – June 14, 2013

The Economist – The global poverty rate, measured by how many people live on less than $1.25 a day, has halved from 43 percent in 1990 to 21 percent in 2010. Economic growth in China, India, and other developing nations has driven that reduction in poverty.

The Poor giving more to Charity than the Rich

The Week – April 5^th, 2013

TheAtlantic.com – In 2011, the poorest 20 percent of Americans gave 3.2 percent of their income to charity. The wealthiest 20 percent were far stingier, donating just 1.3 percent. Researchers say those with less to share may have “higher empathy” because they’re more exposed to need.

Free Working Environment Raise Productivity

The Week – April 12^th, 2013

The Wall Street Journal – Economists at Stanford University and the University of Chicago estimate that, between 1960 and 2008, 15 to 20 percent of the growth in U.S. productivity came from removing the barriers blocking white women and blacks of both genders in the workforce.

Making a Million in America

The Week – February 22nd, 2013

The Economist – It takes the average American household about 25 years to earn a million dollars—the fastest rate of any country. In Mexico and Romania, by contrast, the average family would take more than three centuries to rack up $1 million in pretax earnings.

The Next Industrial Revolution

The Week – January 18, 2013

Instead of fiddling around at home, we’re likely to turn to manufacturing hubs with specialist 3-D printing machines, “rather like when people go to specialist shops to get higher quality photos printed,” said Richard Hague, an expert on 3-D printing at Loughborough University in the U.K. Once introduced on an industrial scale, 3-D printing could have a profound economic impact. Companies would no longer need to keep huge warehouses filled with goods, as products could be printed locally on demand. And 3-D printing could compel American manufacturers to repatriate production now done abroad. “There is nothing to be gained by going overseas,” said Bespoke Innovations co-founder Scott Summit, “except for higher shipping charges.”

Resolution of Canada’s Debt Crisis

The American Spectator – October 2011

In 1994, Canada’s debt crisis was as bad as that of America today, and prompted the
Wall Street Journal to label it an honorary member of the Third World. However, the country quickly turned itself around. Prime Minister Chretien and his minister of finance forced spending cuts that Paul Ryan could only dream of on a reluctant Liberal Party. Over the next 16 years, Canada’s federal debt fell 67% to 29% of GDP, and in every year between 1997 and 2008 the federal government had a budget surplus. The Canadian government didn’t just cut the growth rate of spending, a budgetary trick employed in the U.S. budget deal last August. It also cut absolute spending on many programs in dollar terms.

America – Manufacturing Productivity

The Atlantic – December 2012

And of course, manufacturing employment will never again be as central to the U.S. economy as it was in the 1960s and 1970s – improvements in worker productivity alone ensures that. Appliance Park in Kentucky was turning out 250,000 appliances a month back in the 1960s. The assembly lines there today are turning out almost as many – with at most one-third of the workers. U.S. and China’s manufacturing output in dollars is about the same but the U.S. uses only 10% of the workforce used in China! 10% to 20% of the goods that the U.S. imports from China can now be made in the U.S. China is two times more energy intensive in its manufacturing than the U.S. As of July 2012 the Yuan is 40% undervalued to the U.S. dollar.

Charity and Taxation

The Economist  – June 9th, 2012

The American tax system, [Charles Clotfelter, an economist at Duke University] points out, “gives the wealthiest taxpayers a disproportionate role in allocating public resources.” In 2008, individual Americans with incomes over $500,000 (who make up less than 1% of taxpayers) accounted for 18% of all income and made almost a quarter of all charitable donations. By contrast, the two-thirds of taxpayers with incomes under $50,000 earned about 20% of total income and made about 20% of all donations. In 2006 taxpayers with incomes over $100,000 received 76% of the total $40.9 billion tax subsidy due to the charitable deduction, although they made only 57% of all donations; those with incomes of less than $50,000 received a mere 5% of the subsidy, despite making one-fifth of all charitable donations.

A third industrial revolution

The Economist – April 21, 2012

[…] Nissan’s British factory in Sunderland, opened in 1986, is now one of the most productive in Europe. In 1999 it built 271,157 cars with 4,594 people. Last year it made 480,485 vehicles—more than any other car factory in Britain, ever—with just 5,462 people.

As the number of people directly employed in making things declines, the cost of labour as a proportion of the total cost of production will diminish too. This will encourage makers to move some of the work back to rich countries, not least because new manufacturing techniques make it cheaper and faster to respond to changing local tastes.

[…]

The wheel is almost coming full circle, turning away from mass manufacturing and towards much more individualized production. And that in turn could bring some of the jobs back to rich countries that long ago lost them to the emerging world.

The Economist – April 21, 2012

Despite China’s rapid rise, America remains a formidable production power. Its manufacturing output in dollar terms is now about the same as China’s, but it achieves this with only 10% of the workforce deployed by China, says Susan Hockfield, president of the Massachusetts Institute of Technology (MIT) and co-chair of President Barack Obama’s Advanced Manufacturing Partnership, an initiative recently set up with business and universities to create jobs and boost competitiveness.

The Economist – April 21, 2012

The Boston Consulting Group reckons that in areas such as transport, computers, fabricated metals and machinery, 10-30% of the goods that America now imports from China could be made at home by 2020, boosting American output by $20 billion-55 billion a year

Computers and Technology

Magnetic Tape to the Rescue

The Economist – November 30th, 2013

Alberto Pace, head of data and storage at CERN, says that tape has four advantages over hard disks for the long-term preservation of data. The first is speed. Although it takes about 40 seconds for an archive robot to select the right tape and put it in a reader, once it has loaded, extracting data from that tape is about four times as fast as reading from a hard disk.

The second advantage is reliability. When a tape snaps, it can be spliced back together. The loss is rarely more than a few hundred megabytes—a bagatelle in information-technology circles. When a terabyte hard disk fails, by contrast, all the data on it may be lost. The consequence at CERN, specifically, is that a few hundred megabytes of its 100-petabyte tape repository are, on average, lost every year. Of the 50 petabytes of data held on hard disk, however, it loses a few hundred terabytes in the same period.

The third benefit of tapes is that they do not need power to preserve data held on them. Stopping a disk rotating by temporarily turning off the juice—a process called power cycling—increases the likelihood that it will fail. The fourth benefit is security. If a hacker with a grudge managed to break into CERN’s data center, he could delete all 50 petabytes of the disk-based data in minutes. To delete the same amount from the organization’s tapes would take years.

Tape has two other benefits, as Evangelos Eleftheriou, manager of storage technologies at IBM’s research laboratory in Zurich, points out. It is cheaper than disks (a gigabyte of disk storage costs 10 cents, versus 4 cents for tape), and it lasts longer. Tapes can still be read reliably after three decades, against five years for disks.

Virus Based Batteries

The Economist – November 23rd, 2013

… researchers think they can produce a (modified virus) lithium-air battery with an energy density more than twice that of the best lithium-ion cells. That would make a lot of difference to portable electronic products. A typical lithium-ion battery can store some 150 watt-hours of electricity in one kilogram of battery—itself a huge advance over the 45-80 watt-hours of a nickel-cadmium battery, let alone an old-time lead-acid battery’s 30 watt-hours.

Neuromorphic Computing – Computers with Real Brain Power

The Economist – August 3rd, 2013

These visionaries describe themselves as neuromorphic engineers. Their goal, according to Karlheinz Meier, a physicist at the University of Heidelberg who is one of their leaders, is to design a computer that has some—and preferably all—of three characteristics that brains have and computers do not. These are: low power consumption (human brains use about 20 watts, whereas the supercomputers currently used to try to simulate them need megawatts); fault tolerance (losing just one transistor can wreck a microprocessor, but brains lose neurons all the time); and a lack of need to be programmed (brains learn and change spontaneously as they interact with the world, instead of following the fixed paths and branches of a predetermined algorithm).

New Lift Weight Cables for Skyscrapers

The Economist – June 15, 2013

Carbon fibers are both stronger and lighter than steel. In particular, they have great tensile strength, meaning they are hard to break when their ends are pulled. That strength comes from the chemical bonds between carbon atoms: the same sort that give strength to diamonds. Kone embeds tubes made of carbon fibers in epoxy, and covers the result in a tough coating to resist wear and tear.

According to Johannes de Jong, Kone’s head of technology for large projects, the steel ropes in a 400-metre-high lift weigh about 18,650kg. An UltraRope for such a lift would weigh 1,170kg. Altogether, the lift using the UltraRope would weigh 45% less than the one with the steel rope.

Besides reducing power consumption, lighter ropes make braking a car easier should something go wrong. Carbon-fiber ropes should also, according to Mr. de Jong, cut maintenance bills, because they will last twice as long as steel ones. Moreover, carbon fiber resonates at a different frequency to other building materials, which means it sways less as skyscrapers move in high winds—which is what tall buildings are designed to do. At the moment a high wind can cause a building’s lifts to be shut down. Carbon-fiber ropes would mean that happened less often.

All of which is worthy and important. But what really excites architects and developers is the fact that carbon-fiber ropes will let buildings rise higher—a lot higher.

Zapping Corruption

The Economist – June 1st, 2013

Other officials, such as veterinarians who are paid to travel to farms to deworm cows, have to take smartphones to record themselves at work and upload geotagged self-portraits to an official website. This makes it possible to check that they are actually turning up for work. They are also required to record the phone numbers of farmers they visit, some of whom are randomly called afterwards to be asked if the service was up to scratch.

Mr. Saif is also trying out a model devised by Zubair Bhatti, a former Pakistani local-government official who now works for the World Bank. It involves making random calls to users of public services—including the police, health services and administrative services such as registering property—to inquire about the quality of service and whether they were asked to pay a bribe. Anyone who volunteers his mobile-phone number (so far, more than 1.3m people have signed up) will get a two-minute robocall from Mr. Sharif, the chief minister. He explains that they will shortly receive a text message reviewing their encounter with a local official.

Even among the poorest fifth of households, 80% now use phones, so the technology can reach almost everyone. Illiteracy is a problem, but the chief minister’s call alerts a recipient to get help, if needed, with reading the text message when it arrives. It contains a specific question: did the police respond, as required, within 15 minutes of your emergency call? Were you asked for a bribe at the hospital, or when registering property? By collating the responses it is possible to spot problem departments and crooked officials.

Bees Sniffing for Mines?

The Week – May 29th, 2013

Land mines have killed more than 300 people in Croatia—including 66 working to deactivate them – since the Yugoslav wars of the 1990s ended. Now Croatian researchers are developing a new tool to locate the estimated 250,000 mines still buried in formerly war torn regions across former Yugoslavia: trained honeybees. Unlike people—or dogs and rats, which have been employed to sniff out land mines – honeybees are too light to trigger the devices, and their excellent sense of smell lets them pick up a scent up to three miles away. To train bees to hunt for TNT, researchers from Zagreb University corral numerous hives inside a tent with pots containing different-smelling solutions. Only the pots that give off a whiff of TNT contain a sugar-water reward, training the bees to associate the explosive with food. Researchers hope the bees will soon be ready to fly over fields that have already been checked for mines to find those that may have been missed. “There are never zero mines on a de-mined field,” bee expert Nikola Kezic tells the Associated Press, “and that’s where bees could come in.”

Beyond the PC

The Economist – October 8th, 2011

The cheapest Kindle, an e-reader from Amazon, sells for $79, against $399 for the first version launched in 2007. The cost of digital storage has also fallen dramatically. A gigabyte (GB) of storage, which is roughly enough to hold a two-hour film after compression, cost around $200,000 in 1980; today a disk drive holding a terabyte, or 1,024GB, costs around $100. These economic trends are being reinforced by several technological ones. Arguably the most important has been the ability of microchip-makers to squeeze ever more computing power onto their products, as Moore’s law (which holds that the number of transistors on a single chip doubles roughly every two years) has continued to operate. James Bruce of ARM, a British company that designs chips for the iPhone and other portable devices, reckons today’s versions are 40 times more powerful than those around in 2000.

Lighting the way for the poor

The Economist – September 1st, 2012

The potential savings are huge. According to a recent study by the International Finance Corporation, an arm of the World Bank, $10 billion a year is spent on kerosene in sub-Saharan Africa alone to illuminate homes, workplaces and community areas. Globally, the figure has been put at $36 billion. Flexiway, an Australian-Argentine maker of solar lamps, found in its trials in Tanzania that households often spent more than 10% of their income on kerosene, and other studies have put the figure as high as 25%.

Take a look at some of the solar lamps now available in Africa, Asia and Latin America, and their advantages are immediately apparent. Even the most basic solar lamps outperform kerosene lanterns. A typical device takes eight to ten hours to charge, and then provides four or five hours of clear, white light from high-efficiency white LEDs. The number of times solar lamps can be charged before their internal batteries wear out has improved enormously in recent years, along with their ability to cope with dust, water and being dropped. The starting price of $10 or so is still too high for the poorest customers to pay, at least up front. But as with mobile phones, prices continue to fall and novel business models are starting to provide new ways to spread the cost.

Salt-tolerant rice: Nuclear-powered crops

The Economist  – May 5th, 2012

Those who turn their noses up at “genetically modified” food seldom seem to consider that all crops are genetically modified. The difference between a wild plant and one that serves some human end is a lot of selective breeding—the picking and combining over the years of mutations that result in bigger seeds, tastier fruit or whatever else is required.

[…]

Dr. Abe’s plan is to use these mutations to create salt-tolerant rice. She has tried to do that several times in the past, but the result did not taste very nice. Her latest effort was stimulated by the flooding with seawater of almost 24,000 hectares of farmland by the tsunami which followed an earthquake in March last year. Salt-tolerant rice would, though, be of much wider use than just restoring the paddies of Miyagi prefecture and its neighbors, the worst-affected part of the country, to full productivity. About a third of the world’s rice paddies have salt problems, and yields in such briny fields may be half what they would be if the water in them were fresh.

Health

Growing a Human Liver

The Week – July 26, 2013

Scientists have previously built windpipes and arteries for transplant by growing stem cells on plastic scaffolds, but that method has failed for solid organs like livers. Researchers hope that growing tens of thousands of liver buds could yield enough tissue to patch up—and one day even replace—failing organs. Nearly 17,000 people are awaiting liver transplants in the U.S.; last year, just over 6,000 people received one.

World is Meant to Stop using Leaded Petrol

The Economist – November 21st, 2012

So things went until the 1970s. As lead in paint, pipes and pesticides was outlawed, more and more studies confirmed that lead particles from car exhaust, filling the air, packing the soil and contaminating crops, were also bad for everyone, especially children. Lead not only made them ill. It had more subtle effects on the nervous system, rendering children anti-social, violent and aggressive: with a time-lag of 20 years or so, the crime rate exactly reflected childhood exposure to lead. Intelligence was affected, too: a blood lead level of even 5 µ/dl was enough to damage the infant brain, and with permanent effect.

[…]

The removal of lead from all petrol, then, should usher in a Golden Age. In America, since the ban of 1996, researchers estimate that IQ scores have risen by several points and 58m crimes have been avoided. The spread of peace to some of the world’s more benighted countries may happen not because leaders parley or Western troops leave, but because the element of wickedness has been taken out of their cars. In so far as lead survives, it will no longer be in forms that can be widely ingested or inhaled.

Alcohol policy: On the Floor

The Economist – March 31st, 2012

No other country has set a floor price for alcohol. But some Canadian provinces have made some or all drinks more expensive*. They tend to witness a rapid drop in consumption, crime and hospital admissions as well as a fall in alcohol-related illnesses after two to four years, says Tim Stockwell of the University of Victoria. A University of Florida study of consumption in more than 30 countries found that a 10% price rise led to a 4.6% cut in drinking.

War and Crime

Worldwide military spending falls

The Week – April 26th, 2013

Economist.com – Global defense spending fell by 0.5 percent to $1.75 trillion last year, marking the first annual decline since 1998. The U.S. still spends the largest fraction of this total and 69 percent more than it did in 2001, but its share of worldwide military spending has fallen below 40 percent for the first time since 1991.

Death Penalty in Decline

The Week – October 28th, 2011

Executions themselves aren’t expensive — the lethal injection used by Texas reportedly costs $86 a shot — but the cost of the many, protracted legal battles that precede an execution weighs on state budgets. Every death-penalty sentence goes through multiple appeals, and can take more than a decade to carry out. Each of the 13 executions California has carried out since 1978, a recent study found, cost taxpayers $308 million. Partly for that reason, a poll found this year that, for the first time, California voters favored life imprisonment without the possibility of parole over the death penalty.

The post What About the Good News? appeared first on The Business Ferret.

The success of this company comes, in a large part, from their design but it’s bolstered by the quality present in their products. Ask anyone who wears their garments: Lulu consistently fits well, holds up to regular use, and flatters its owners.

You might think that a company with a strong following that’s closing in on $1.6 billion in sales has nothing to fear but you would be wrong. We ran Lulu’s financials statements through our analysis program and found serious cause for concern. Lulu’s story is a great example of a strong product that could be outdone by poor financial management.

Companies with sound financial performance typically don’t meander far from their success. Unfortunately, Lulu has. The company holds way too much excess cash, which works to increase its cost of capital and lower its return on assets. Having this much excess cash – over $500 million – can produce a feeling of overconfidence for management. We can see some of that overconfidence in their poor use of debt. Excess cash often leads to the mindset that money in the bank means nothing can be gained from conservative debt leverage.

Lulu also manages their working capital poorly. We see this in their net trade cycle, which is getting longer and longer. Every day the net trade cycle increases the company’s cash holding is reduced by $4 million. In the meantime, the company keeps increasing its excess cash. This process is counter-productive. Over the last 4 years, cash reduction caused by the deteriorating net trade cycle has reduced cash holdings by around $80 million.

In the midst of all this financial inefficiency, Lulu, despite their excellent brand reputation, decides that it would be a good idea to lower the gross profit margin. One year might be understandable but three years with a cumulative decrease of 11% is a disaster waiting to happen. If this move was meant to stimulate sales, it didn’t work; sales growth slowed dramatically over the last 2 years. Lowering gross profit margin should never be used to increase sales, particularly if a brand name product or service is involved.

Our advice? If you’re a Lulu customer, buy their clothing now while the margins are thin and quality is still high. If you’re a Lulu executive, reduce the excess cash hanging around and get a handle on your margins before your brand suffers. Nike won’t show you any mercy. 

The post Lululemon – Great Brand, Poor Financial Performance appeared first on The Business Ferret.

5/1/2017 update: We updated our Tesla Motors analysis for 2012 – 2016, published here »

Real Revenue Growth

The nominal and real annual revenue growth rate has been highly variable over the years yet nominal annual growth rate and real revenue growth have both averaged around 78% with the greatest real revenue growth in 2009. This type of on and off intense annual revenue growth is very hard on the company balance sheet resources.

Sustainable Revenue Growth

When looking at real revenue growth we want to know if it is sustainable. In the last four years, the first three were completely unsustainable. In a sense the company is living off the balance sheet resources similar to depleting your emergency savings account. In 2012 the company turned strongly sustainable, although primarily due to a strong slowdown in sales based on annualized year to date September 2012 financials.

Pricing Policy

By 2012 end of third quarter (on an annualized basis,) the gross profit mark-up index drops a dramatic 27%, resulting in a decline in gross profit margin of 81% and 87% in gross profit dollars. By 2012 you could buy a Tesla car for the cost of production with little or no mark-up on the costs to produce!

Operating Expense Control

Sales over the last four years have been somewhat flat, going from $112 million in 2009 to an annualized amount of around $143 million based on the year to date third quarter results. The cost of goods is driving upward and the net operating income is collapsing deeper into the red with now five years of losses and mounting.

EBITDA to Actual Cash Flow

EBITDA and net operating income are all coming in negative and becoming consistently more negative. More importantly, the cash flow before financing is beginning to run into the red with no end in sight.

Debt Free Cash Flow

With revenues over the years being somewhat flat all forms of cash flow are slipping down a greased pole.  There are ways around this, but the company has not yet figured out how or has decided not to address the issue, dangerous at best.

Excess Cash

Cash is not a great determinant here for survivability compared to excess cash generation. Cash can come from additional equity or debt financing but excess cash generation can only come from working capital and the company is aggressively and successfully reducing its working capital needs – the only bright area in the company’s finances.

Return on Assets (ROA)

All forms of return on assets are negative, eating up 30% to 40% of balance sheet capital – a voracious pace. Only the aggressive excess cash generation is offsetting this destruction of capital but not for long.

Working Capital Needs

The improving efficiency of working capital needs is being overwhelmed by the operating income losses that are starting to accelerate further. This is totally unsustainable and can only be offset by more equity investments.

Debt Financing

Asset growth has been at around 100% per year compared to revenue growth rate at 78% annually. Total liability annual growth has only grown at 58% annually, which forces the demand for more equity. Currently the book equity is at a negative net worth of near $50 million. Over the last four years another $900 million in equity has been needed to keep things running.

Net Trade Cycle

Net trade cycle days have dropped from a very lengthy 141 days to 21 days, freeing up $400,000 to cash for every day reduced. The only problem now is that the net trade cycle days cannot be reduced much more unless vendors will wait over 400 days on average to be paid as is currently the case! This solution is running out of gas rapidly and no gas stations in sight.

Cost of Capital and EVA

The company’s average weighted cost of capital is around 18% annually after adjusting for negative equity and over 100% debt financing. The company’s return on assets (ROA) is an average negative 28% annually, which means that the company is destroying wealth at a voracious annual rate of over 45%. This rate of wealth destruction is not a leak but the bursting of a dam.

5/1/2017 update: We updated our Tesla Motors analysis for 2012 – 2016, published here »

Relevant:

• Tesla Model S beats a Viper R/T in a drag race
• Tesla’s ingenious strategy
• Tesla vs. The NY Times regarding a potentially insincere test drive write-up

The post Tesla Motors Financial Analysis appeared first on The Business Ferret.

We used the Business Ferret’s 12 financial metrics to take a long, hard look at Google’s financial record since 2007. We found some ups and some downs but, overall, a strong financial position. Our analysis summary is below and you can download the PDF report below.

» Download our Google Financial Analysis Report [PDF]

Real and Sustainable Revenue Growth

Google has averaged around 25% real growth rate annually, with the exception of 2009 when it was around 7%. So, the real revenue growth is consistently high and stable at a high level. This helps management confidence and shows that they can consistently offer products and services that customers will pay for.

The problem with this high revenue growth is that it is twice the rate of their sustainable annual revenue growth. Google’s balance sheet cannot sustain this growth year after year; they need to increase their internal resources to finance this growth.

Pricing Policy

Google has an excellent pricing policy. This company does not discount its gross profit margin in order to get more sales. In fact, Google is still raising its gross profit margin searching for its optimum level. The company is getting more and more dollars of gross profit for each additional dollar of revenues.

Microsoft needs to take note: this is how pricing policy should be managed.

Operating Expense Control

The only problem with the highly successful year over year pricing policy is that Google has slipped on the control of the operating expenses cannibalizing the additional pricing strength. Where net income should have continued its upward march, it has stalled out in 2011.

This isn’t deadly … yet. Google needs to take control of this metric or it’s sure to start eating away at their margin.

EBITDA versus Actual Cash Flow

EBITDA, net income, and cash flow before financing all grew nicely over the last several years until 2011 when the operating expenses shot upward. Regardless of the reason it happened in 2011, let’s hope, for their sake, it doesn’t continue.

The company piles an inordinate amount of money into “other assets” – 14% of the total book assets of the company. It is unlikely that these other assets are producing the kind of cash flow that the company’s core operations deliver.

With a little better cash management, Google could be in a position to correct it’s sustainable revenue and operating expense problems.

Excess Cash Flow

The company annually produces a massive amount of excess cash flow and it holds 4 times the amount it produces each year in cash balances. This is a lot of dead resources sitting around. This excess cash lowers the return on assets dramatically and drags down the company’s edge on innovation and competitiveness.

What are you scared of, Google? Spend that cash and keep your strong position!

Return on Assets (ROA)

Google’s return on assets is about one quarter of what it should be. Reallocating the excessive amount of cash balances would correct this. Instead of an average 11% ROA the company’s adjusted ROA would vault to almost 45% annually.

Distributing the excess cash balances would not only raise the ROA but could drive up the stock price.

Working Capital Needs

The company creates plenty of excess working capital but invests that cash flow into other assets. It would be more transparent for the company to distribute the excess working capital than to put it into other less tangible assets with less visible earnings capability.

Debt Financing

For a company to have a truly strong financial position, it needs to use both its cash and its debt wisely. Holding a lot of cash without a lot of debt sounds like a good move but this is never the case. Debt, used wisely, is a lever to increase return on assets and revenues. Hoarded cash just sits around, doing nothing and dragging down the return on assets.

Google has way too little debt, considering how cheap an alternative it is to equity financing. With all the extra cash balances and the financing of the total assets, this company is highly inefficient in the use of its resources.

Cost of Capital

Google on average achieves around 66% of its cost of capital with its return on assets. With more efficient financing arrangements and a reduction in the extra cash balances, it could achieve a ROA that would be almost 3 times its cost of capital.

This would create a huge economic value and a premium to the stock value.

Any questions?

If you have any questions about this analysis, please let us know in the comments below. It’s one thing to see the numbers and graphs, but we want to help you understand the implications, whether you’re a business owner, investor, or just a financial hobbyist.

Relevant:

• Google (and Apple) are still killing it in the mobile market
• Google’s stock prices might be losing steam

The post Can Google’s Finances Compete? We Say Yes appeared first on The Business Ferret.

For those not familiar with these terms, principal payments are the portion of your monthly payment applied to what you actually borrowed, rather than the interest you’ve accrued. You can sometimes see these broken out, depending on the lender you’re using, like the example below.

So how do principal payments change the analysis of your debt? Principal payments, generally, make up the majority of your monthly required payment. “Required portion” is the key here. You can’t just pay the interest if you don’t have enough money to pay the full amount. In fact, the minimum interest and minimal principal payment combine to create the required monthly payment – neither portion is optional.

Every loan has different terms to, eventually, pay back the principal. We call this the “loan payment structure.” One loan might have a high interest rate but be, overall, less expensive than another loan with a low interest rate because of the required principal payment or terms to pay back the principal payment. In other words, one loan payment structure could incorporate a higher interest rate but take much less time to pay back, resulting in less overall interest. However you look at it, the interest rate is not the only thing to look at when determining what to pay back.

So how do we determine what to pay off first? By using an important – and long-standing – concept for debt management called the “loan constant”. The loan constant for any loan is calculated very easily:

1. Take the required minimum monthly payment and multiplying that amount by 12
2. Take the result and divide it by the current outstanding loan balance
3. Sort your loans by loan constant

The higher the loan constant the, more harmful that loan is for you. If you wanted to pay off loan balances and did not know which ones to pay first, calculating the loan constant will answer that question. Simply start paying off the highest loan constant value loans first, working your way down the list. Have a tie? Now use the interest rate to make your decision between the two.

As an example, let’s take a credit card with a 12% interest rate and a car loan with an 6% rate. Before we compare the interest rates, let’s calculate the loan constants. Our credit card is making us pay $25 per month on a balance of $2000, giving us a loan constant of 0.15. Our car loan requires us to pay $450 on a balance of $10,000, giving us a loan constant of 0.54. Despite its smaller interest rate, the car loan is the first one we should concentrate on.

Let’s take the loan constant one more step further to be very precise in our choices and management of debt. For a business, mortgage, or student loans, the interest portion of the debt is tax deductible. In order to complete this analysis, you need to look at the impact of the taxable portion of the principal portion of the debt.

The interest portion is deductible, which works to lower the interest cost. The principal portion, however, is taxable, which, in effect, increases the principal amount due. For the times where the interest portion is not tax deductible, the entire amount – interest and principal – paid with after tax funds. This increases the loan constant!

If you add the tax-affected payment portions together, multiply that result by 12, and divide by the current outstanding balance, the result will be a fully tax-affected loan constant. This, now, is the absolute best way to compare one loan to another.

Remember that the lower the loan constant, the better the loan is from a financial point of view!

The post The Loan Constant – An Old “New” Way of Looking at Debt appeared first on The Business Ferret.

We used the Business Ferret’s 12 financial metrics to tear Microsoft’s finances wide open. We found both good signs and bad signs but, overall, there is huge room for improvement. If Microsoft took our advice, it could revive some of its lost luster and improve its stockholder value.

Real revenue growth

Microsoft’s real revenue growth has been, in a word, inconsistent. In some years real revenue growth was higher than its unadjusted (also known as “nominal”) growth and in other years the opposite is true. The company moved back and forth between working harder for less and working less for more. On top of this, two years of mediocre growth was bordered by two years of real revenue growth in excess of 14%.

Who is at the helm here? This kind of inconsistent growth should be a telling sign both to potential investors and Microsoft’s financial team.

Sustainable revenue growth

Fortunately for Microsoft, both the unadjusted and real revenue growth is completely sustainable and could even be as high as 19% annually. This is great for the company if it can find new products and services that increase annual revenues.

Staying stagnant, however, will destroy the best thing they have going.

Pricing policy

Pricing policy is one of Microsoft’s major downfalls. The gross profit margin has been flailing back and forth over the years. In 2011, it finally plummets to the lowest level they’ve seen in the last five years. Microsoft was, for the most part, able to grow the gross profit in line with a bit higher revenue growth but the GP margin was declining at about a half-point annually.

Less than 1% may not seem like much but it equates to an average $300 million of foregone gross profit dollars each and every year over the last five years – a total of $1.5 billion. Ultimately, all this money would have gone right to the pre-tax bottom line. Oops!

Operating expense control

We were surprised to find that Microsoft has done a great job in operating expense control in light of the poor job in gross profit margin maintenance. In 2009, operating expenses to revenues was 45% and by the end of 2011 the percentage fell to 37%. This was the real financial success story for Microsoft.

It’s just too bad this advantage was wasted by a poor pricing policy!

Excess cash

This is another one of Microsoft’s major downfalls – and it is a big one.

Microsoft generates an astounding $20 billion in excess cash every year. In 2011, it was $26 billion excess. The company currently holds $50 billion in working capital cash. In other words, the company is holding an enormous, non-producing asset that is substantially lowering their overall return on assets and increasing its cost of capital. Big mistake.

Microsoft could distribute the entire $50 billion and be back to $25 billion in cash reserve within a year.

Holding large cash balances has the effect of eroding a company’s productive edge. Instead of creating new ideas, a company looks to buy new ideas (Skype? Yammer?), pay too much, and then bury the new purchased company’s products and services within the larger company. Holding large cash balances produces a lazy culture for many companies.

Microsoft needs to put their cash somewhere besides their sock drawer and start innovating again!

Return on assets (ROA)

We mentioned return on assets in the prior metric so what does this mean in relation to Microsoft? The company’s average return on assets is a healthy and strong, 18.5% annually. If we adjusted for excess cash and other assets, the average could be 62% If the ROA is adjusted fully, including efficient financing, it could be 100% – per year!

Two thirds of the adjustment in average ROA from 18.5% to the 62% first level adjustment is due to holding too much cash. This is an astounding mistake on the company’s part and holds down the company’s stock value year after year.

Debt Financing

Difficult as it may be to believe, Microsoft could use additional cheaper cost debt in its capital structure mix. The way Microsoft thinks, the additional funds would probably be put back into cash – exactly the wrong place.

Inefficient use of debt and holding too much cash crushes ROA and jacks up the cost of capital as we will see shortly. This does a great job eliminating value!

N­et Trade Cycle

Microsoft has learned over time what a correctly run net trade cycle can do for a company. Our question is “why did it take them so long to get it?”

For every day that Microsoft lowers its net trade cycle, an average of $176 million cash comes out of its working capital. It took four years for the company to move from a net trade cycle of 65 days down to 37 days releasing, $4.8 billion out of its working capital.

They could still remove another 10 days out of the trade cycle, freeing up $1.8 billion. This is a great trend for Microsoft to continue.

Cost of Capital (COC) and Economic Value Added (EVA)

Now, we come full circle to where the income statement and the balance sheet intersect. The average annual cost of capital for Microsoft is around 33%, too high. This high cost of capital is due to combining a consistent return on equity with too much expensive equity used to fund their capital structure.

Remember the above discussion about the ROA at 18.5%? With a COC at 33% and a ROA at 18.5%, the company is withholding shareholder. Annual book equity growth (book equity is the original equity investment) is around 15% annually. While this is a healthy growth rate, it is overwhelmed by the inflated capital cost. The COC needs to be reduced or the ROA needs to increase, both of which involve getting rid of that excess cash!

This is an astounding financial oversight by Microsoft’s management and is costing the company in a big way. Microsoft has, unfortunately, become a deceptive wealth destroyer in its maturity.

Edit: Great article from Vanity Fair about Microsoft’s missteps in the last decade. Addresses the culture, the lack of innovation, and Ballmer’s shortcoming’s as a product innovator.

The post Microsoft Financial Analysis – Destroying Value with Too Much Cash appeared first on The Business Ferret.

Download our Yahoo financial analysis as PDF

Yahoo! Real Revenue Growth

The adjusted annual revenue change is now declining rapidly. The decline in 2011 alone was 43%. A new overall strategy – instead of chasing after established incumbents – could restart revenue growth in a big way. They’re positioned well for this change but can they do it?

Yahoo! Sustainable Revenue Growth

The real revenue decline is a serious problem but Yahoo’s resources are, currently, quite strong. The “bright” side of the real revenue decline is that the financial resources of the company are not being depleted much … yet.

Yahoo! Pricing Policy

The company was able to increase pricing dramatically in 2011  – almost 20%. This increase has greatly compensated for the decline in revenues over the last three years. In other words: they needed it. This company knows how to maintain the pricing of its brand, which will serve it well in strategic rejuvenation.

Yahoo! Operating Expense Control

Net operating margin recovered to its highest level in years at almost 16% to revenues in 2011. This is the highest dollar amount of net operating income in the last 5 years. Yahoo! is making more and more money with less and less revenues – a real survivor mentality

Yahoo! EBITDA To Actual Cash Flow

Yes, the infamous EBITDA has risen in the last four years along with increasing net income but the cash flow before financing declined by almost $800,000 coming into 2011 due to another hidden factor, covered below. This would be very serious for most companies but there is a hidden opportunity for Yahoo!

Yahoo! Debt Free Cash Flow

The adjusted debt free cash flow rose in 2009, then flattened out in 2010, then dropped slightly. The adjustment to cash flow takes out the investment into other assets on the balance sheet, which does not have to be made in order to continue operations. These investments affected cash flow in 2009 and 2011, causing serious declines. Yahoo! Needs to stop investments in other unnecessary assets and focus on the business at hand.

Yahoo! Excess Cash

Yahoo! was producing excess cash over and above their required cash for operations from 2008 to 2010 and then declined 70% in 2011. The culprit for all these declines is explained below. The company holds too much cash – over a billion dollars – which drives down their return on assets and drives up the cost of capital. Distribute and reward your loyal shareholders so they stick with you long enough for a new strategy to take hold.

Yahoo!’s Return On Assets (ROA)

Although adjustments to the ROA results in increasing annual returns, the actual ROA is a miserable 4% to 5% annually. The excess cash generation to assets is also very low and declining year after year. The company must immediately fix the working capital structure to resume production of annual excess cash that can be invested back into a new business strategy.

Yahoo! Working Capital Needs

The working capital current assets (not counting cash balances) were funded by accounts payable and other payables for every year from 2007 to 2010. The net income produces excess working capital resources. The big issue here is that the accounts receivable (as a percentage of revenues) is increasing every year, rapidly eating up cash resources. As this percentage increases without a corresponding increase in current liabilities, the cash resources and cash flow of the company will dry up. There is NO reason for this to happen – not even to the extent that it has so far.

Yahoo! Debt Financing

The use of equity to finance total assets is way too high. This keeps the cost of capital higher than it need be while lowering the ROA – not good. Equity is expensive and debt is a cheaper form of financing but the company shows its fear of the future by holding too much cash. Yahoo! needs to distribute it or invest it.

Yahoo! Net Trade Cycle

The net trade cycle is one of the major problems with the declines in cash flow. This, however, affords the company a real valuable benefit. The net trade cycle has increased from 45 days to 63 days driving the cash flow to a negative $137 million in 2011. If the net trade cycle drops back to 45 net trade days then the release to cash would be up to $250 million. Don’t think this can happen? It is exactly what Facebook did in 2011, much to its immediate benefit.

Yahoo! Cost of Capital and EVA

Yahoo!’s cost of capital is arbitrarily low due to the unacceptable low return on equity averaging – less than 7% over the last four years ending 2011. Yet over the same period, the ROA has averaged less than 5% per year. So every year the company is unable to hurdle its own low cost of capital destroying capital every year this situation exists. The result is lower and declining stock value year after year which Yahoo! has experienced over the last five and ten years.

Download our Yahoo financial analysis as PDF

Related around the web:

• Marissa Mayer might be the shake-up Yahoo needs
• Yahoo products will focus on “presentation and mobile” going forward

The post Yahoo! Is Financially Poised for a Turn-Around – Our Analysis appeared first on The Business Ferret.

We used the Business Ferret key financial metrics to generate the analysis below. These metrics give a complete, historic picture of Facebook’s finances, as well as an accurate prediction of future performance. Some of what we found won’t surprise you, but one little trick with Facebook’s net trade cycle in 2011 makes the rest of their finances suspect.

Download the Facebook financial analysis as a PDF

Facebook’s Real Revenue Growth

Facebook has had tremendous real revenue growth, but that growth has been slowing since 2009.

Their revenue is really the only salient point of the argument for the high valuation but, in the end, it doesn’t pan out. In fact, all of the post-IPO brew-hah-hah has been focused on the slowing revenues, which, as we’ll see, is actually good for the company.

Facebook’s Sustainable Revenue Growth

The average sustainable revenue growth has only been 7% over the last 4 years and the company has grown real revenue growth at 17 times that pace.

Facebook’s need for working capital is like a homeless person at a smorgasbord; the company is literally eating the balance sheet alive and rapidly reducing cash flow.

Pricing Policy for Facebook

Some good news! Facebook has good control of its pricing policy and has been pushing the positive pricing actively.

In 2008, the company experimented with low pricing for high margins but realized what a disastrous concept that is. After working harder and harder for less and less money, they corrected course and ended up in a good position today.

Facebook’s Operating Expense Control

Facebook gets great marks on control of operating expenses.

Increasing gross profit margins resulted in expanding net income margins and dollars.

It’s the least they can do in the face of their extreme stock value.

EBITDA to Actual Cash Flow

Facebook is a classic example of how misleading EBITDA can be (we call it “EBITduh!”).

Net income is way up and EBITDA is way up … but cash flow is flat and threatening to decline. In fact, if it were not for a financial trick that Facebook employed in 2011 (see Net Trade Cycle below), the cash flow would have tanked, dropping to a negative $100 million. This is not good, yet no one has noticed.

This proves how careless the average stock investor actually is.

Debt Free Cash Flow for Facebook

Adjustments to cash flow showed the same issue: the cash flow peaked in 2010 and started to decline again. Allowing for the net trade cycle trick implemented in 2011, Facebook has had only one year of positive cash flow, 2010.

This cash flow should not afford such an astronomical valuation!

Facebook’s Excess Cash

In 2011, Facebook actually showed a turn towards production of working capital excess cash. Removing the financial trick implemented in 2011 eliminates this positive trend and would have put it on track for needing working capital cash of $100 million, not an excess of $73 million.

In other words, the company really needs more and more cash in working capital, not less and less.

Yes, Facebook has $4 billion in cash but this is way too much sitting around. If the cash need is $100 million, $1 billion in cash holding would be quite sufficient!

Facebook’s Return on Assets

The average return on assets for Facebook is around 12%. With a more efficient use of capital, however, that could increase to 32%.

A company like Facebook, with such a lofty stock valuation, has no excuse to ever be allocating capital inefficiently.

Working Capital Needs for Facebook

For most of the last five years, Facebook has fallen short on financing its working capital.

The excess occurred finally in 2010 and 2011 but, with the net trade cycle adjustment in 2011, the working capital would not produce an excess.

Facebook’s Debt Financing

As mentioned before, Facebook uses too little debt financing and holds too much cash balances. Equity is very expensive yet Facebook uses around 75% equity to finance its capital structure.

Capital is scarce for all companies – misuse it and you will lose it.

Facebook’s Net Trade Cycle

Here’s that financial trick we’ve been talking about.

The net trade cycle had been fairly stable up to 2010 at around a positive 62 days. But in 2011, the net trade cycle curiously declines over 16 days resulting in an increase in cash flow for the year of an additional $162 million.

The majority of this improvement happened by shortening the collections of the accounts receivable (AR). The timing is suspect but the important question is if this change is sustainable.

If this shorter AR collection period is not sustainable then Facebook would have manipulated its finances before its IPO.

Cost of Capital and Economic Value Added for Facebook

For every year over the last five years the cost of capital has exceeded the return on assets. This means that Facebook has not created value over and above its book equity – only the investors did by paying too much for the stock.

In fact, the company has never created enough spread between their cost of capital and return on assets to justify its book equity value, based on its own numbers!

In the last two years, if the company used its capital (debt, equity, and cash) efficiently and correctly it would have been able to hurdle its cost of capital with its adjusted ROA … but still not enough to even come close to the IPO value.

Download the Facebook financial analysis as a PDF

Relevant

• Barron’s says that Facebook might be worth $15 a share.

The post Facebook Financial Analysis – Potential Manipulation? appeared first on The Business Ferret.

In “When Is Revenue Real?” we examined the belief that more revenue means more market share and more success, and we found that trying, like Wal-Mart, to compete on prices to get market share will drag down your profits. Now let’s imagine your business has gone the other direction and increased prices.

If your nominal revenues increased 10%, but you had raised prices 10%, you would have zero net Real Revenue Growth. You didn’t sell any more than last year; you just charged more for what you sold. Let’s say your revenue growth increased 10%, but at the same time you raised prices 15% across the board. Your real revenues declined 5%! Your nominal revenues increased, but you actually did less business.

Remember nominal revenue growth is simply measured by the change in revenue growth from one year to the next, positive or negative, as a percentage over the prior year. Measuring revenues this way does not account for any change in pricing or improvement in managing the cost of goods sold (or direct costs with a service business).

As demonstrated above, The Business Ferret subtracts price adjusted revenue growth from nominal revenue growth to determine Real Revenue Growth. Price adjusted revenue growth can be determined easily by dividing gross revenues by the cost of goods sold, producing the gross profit mark-up index. The change in the mark-up index represents the actual price increase or decrease overall within your firm.

The post More and More Revenue is NOT the Answer appeared first on The Business Ferret.

It’s best to either redeploy your cash in your business or take it out of the business to invest elsewhere, even if your business has to borrow cash with interest expense. Using Return on Assets (ROA), one of The Business Ferret’s 12 key financial metrics, we can easily see why it’s best to invest.

Imagine your firm holds $500,000 of total assets, including $100,000 in cash. Given current low interest rates, let’s assume your cash is earning 2% ROA (after tax), or $2,000 annually. Your business should earn a higher return on total assets than it earns on cash balances, so let’s assume your business is earning 12% ROA (after tax) on total assets including cash, or $60,000 annually.

It’s not hard to see that if you redeployed your cash in your business, then your firm’s annual ROA on that $100,000 would increase from 2% to 12%, increasing earnings from $2,000 to $12,000.

But what if there’s no redeployment opportunity in your business? This is the point at which most business owners stop analyzing and sit on the cash, but we’ll use ROA to look further.

If you take that $100,000 cash out of your business and instead use a line of credit for intermittent cash needs, your ROA will increase. Still assuming your business has an ROA of 12%, or $60,000 return on $500,000 of total assets, removing the cash would increase your ROA to 14.5% ($60,000 minus $2,000 of interest income divided by $400,000 total assets).

The cash is dragging down your ROA by 17%; without it, your return would be 21% higher!

Are you complaining, “But now I have to pay interest”? Even if you borrow the entire $100,000 for a whole year at 7% interest, your after-tax cost would be $5,000. Subtracting $2,000 of foregone interest income and $5,000 of after-tax interest expense from your $60,000 ROA, your company earns $53,000 in after-tax income. Dividing by $400,000 in total assets, you produce a 13.25% ROA, still up from 12%.

By taking that $100,000 cash out of your business, you are free to put it in a higher-ROA investment. The main issue, though, is that you reduce the risk of your overall asset holdings by diversifying your investments. Even if you put your cash in the same bank at 2% ROA, by taking it out of your riskier business asset, you will have reduced your overall risk.

Still want to hold onto that cash?

The post Excess Cash – What Is It and What To Do With It appeared first on The Business Ferret.

When most firms hire a CPA they are looking primarily for one who comes with good recommendations. An excellent CPA doesn’t have to know how your industry works in order to prepare your financial statements or taxes. How about your bookkeeper, how do you find that person? Probably the same issues that apply to the CPA apply to the bookkeeper.

If you look for an inventory specialist don’t you want the best whether they know your business or not? Inventory is – basically – inventory. Yes, wine inventory is different from eggs and eggs are different from specialty composite materials but at the end of the day it is all inventories. The age of inventory and the accounting for inventory can be different but it does not change the fact that it shows up as inventory dollars on the balance sheet!

What about the investment banker? Do you want to work with someone who is considered an expert in the field of selling companies doing the greatest volume or would you want a small boutique that only sells your type of firm? One of the greatest investment bankers, Bruce Wasserstein, opined that industry experts can be limiting because, “tactical and strategic considerations know no industry boundary.”

Finance was at the center stage of the 2009 mega-recession yet firms still don’t apply strategic finances to their business. They all seem to know that cash is “king” but that has really always been true. Business owners seldom hear from their specialist consultants how important cash flow is to the firm.

When did the last industry expert talk to you about how important return on assets (ROA) is to the owner and firm? How many of your experts talked to you about cash conversion cycle (CCC) or net trade cycle? How about your cost of capital (COC) and why ROA has to exceed the COC in order to increase your equity value?

I could go on, but the answer is most often that no one has said anything about finance to you, let alone held you accountable for accomplishing strategic financial objectives. Strategic finance knows no boundary within industry firms or between industries. Business is business and finance is finance no matter what you sell.

The post How Can Strategic Finance Help My Business? appeared first on The Business Ferret.