Trends – Roth&Co

Back to industry updates

The 2022 new year started with three consecutive weeks of downhill stock prices followed by a brief lapse into correction territory – as defined by a drop of 10% or more. This comes after the S&P notched 70 all-time highs last year – a record only second to 1995. Over the past two years, growth stocks have had all the fun, with large-cap and mid-cap growth stocks close to doubling the performance of their value stock counterparts.

Taking advantage of interest rates at near zero percent, growth companies were perfectly placed to borrow funds at historically low costs, using the funds to continue to expand and grow their market share.

The picture for 2022 includes growth stocks that have taken the brunt of the market dip. Why? Analysts are touting inflation as this year’s primary concern. Jerome Powell, Chair of the Federal Reserve Board, spent last year arguing that the surge in inflation during the pandemic was due to “transitory forces”. But by November of 2021, even he threw in the towel and told Congress that it’s “probably a good time to retire that word.” There are factors that contributed to inflation that do not seem to be transitory at all.

You may be wondering, “What does inflation have to do with the stock market? Prices are going up substantially , but shouldn’t that help companies make more money?” In fact, inflation negatively affects the stock market in multiple ways. Factors ranging from higher borrowing costs to lower margins. Historically, high inflation periods offer investors a much better return on their lower-risk fixed-income investments. This, in tum, prompts investors to lower their allocations to higher-risk stocks/equities.

Smaller companies, and companies focused on future growth, are especially affected by higher inflation. For companies to continue making a profit they need to be able to pass along their Inflated costs to their customers. Larger companies, with strong, loyal customer bases, have a much easier time passing costs along. But smaller companies or high-growth businesses often struggle with heavy competition and are only beginning to establish a loyal customer base.

Inflation plays an important role when analysts try to calculate a present valuation based on a company’s future cash flows. In order to estimate a current company valuation, analysts calculate the value using a discount rate. The calculation requires a multitude of estimations on revenue growth and margins, and then it discounts the risk associated with each company. Once all those calculations are made, inflation must be added to the discount rate. The value of $100 dollars today does not hold the same value of $100 dollars in five years’ time. The higher inflation expectations are, the less that $100 dollars will be worth in five years. So, when calculating a current value on a future cash flow, in addition to risk contributing to the discount rate, inflation also plays an integral role. With all this in mind companies that are primarily expecting to make profits in the future – as opposed to companies that are generating current cash flow – are greatly impacted by inflation.

All investments have a risk-reward ratio; there is no reward without risk. Generally, the higher the reward, the more risk you will need to bear. Good short-term performance is not hard to accomplish, but replicating that performance is the hard part. An investor would need to have a perfect understanding of the how’s and why’s of his short-term outperformance before attempting to replicate his model – an almost impossible task.

At the beginning of 2021, a friend of mine asked me why he should invest with a professionally diversified portfolio when, “My account is up 110% since Covid. I’ve invested in a handful of growth companies .” His assessment was followed by a substantial drop in small caps and growth stocks, leaving his healthy account bruised and diminished.

Managing your investments on your own can work well in the short term but keeping performance riding high in the long run is where things get tough. At Equinum, we’re here to help you with that. Contact us at info@equinum.com.

Back to industry updates

The IRS began accepting 2021 individual tax returns on January 24. If you haven’t prepared yet for tax season, here are three quick tips to help speed processing and avoid hassles.

Tip 1. Contact you accountant soon for an appointment to prepare your tax return.

Tip 2. Gather all documents needed to prepare an accurate return. This includes W-2 and 1099 forms. In addition, you may have received statements or letters in connection with Economic Impact Payments (EIPs) or advance Child Tax Credit (CTC) payments.

Letter 6419, 2021 Total Advance Child Tax Credit Payments, tells taxpayers who received CTC payments how much they received. Since the advance payments represented about one-half of the total credit, taxpayers who received CTC payments need to file a return to collect the rest of the credit. Letter 6475, Your Third Economic Impact Payment, tells taxpayers who received an EIP in 2021 the amount of that payment. Taxpayers need to know the amount to determine if they can claim an additional amount on their tax returns.

Taxpayers who received an EIP or CTC payments must include that information on their returns. Failure to include this information, according to the IRS, means a return is incomplete and will require additional processing, which may delay any refund owed to the taxpayer.

Tip 3. Check certain information on your prepared return. Each Social Security number on your tax return should appear exactly as printed on the Social Security card(s). Likewise, make sure that names aren’t misspelled. If you’re receiving your refund by direct deposit, check the bank account number.

Failure to file or pay on time

What if you don’t file on time or can’t pay your tax bill? Separate penalties apply for failing to pay and failing to file. The penalties imposed are a percentage of the taxes you didn’t pay or didn’t pay on time. If you obtain an extension for the filing due date (until October 17), you aren’t filing late unless you miss the extended due date. However, a filing extension doesn’t apply to your responsibility for payment. If you obtain an extension, you’re required to pay an estimate of any owed taxes by the regular deadline to avoid possible penalties.

The penalties for failing to file and failing to pay can be quite severe. (They may be excused by the IRS if your lateness is due to “reasonable cause,” such as illness or a death in the family.) Contact us for questions or concerns about how to proceed in your situation.

Back to industry updates

Now that 2022 is up and running, business owners can expect to face a few challenges and tough choices as the year rolls along. No matter how busy things get, don’t forget about an easily accessible and highly informative resource that’s probably just a few clicks away: your financial statements.

Assuming you follow U.S. Generally Accepted Accounting Principles (GAAP) or similar reporting standards, your financial statements will comprise three major components: an income statement, a balance sheet and a statement of cash flows. Each one contains different, but equally important, information about your company’s financial performance. Together, they can help you and your leadership team make optimal business decisions.

Revenue and expenses

The first component of your financial statements is the income statement. It shows revenue and expenses over a given accounting period. A commonly used term when discussing income statements is “net income.” This is the income remaining after you’ve paid all expenses, including taxes.

It’s also important to check out “gross profit.” This is the income earned after subtracting the cost of goods sold from revenue. Cost of goods sold includes the cost of direct labor and materials, as well as any manufacturing overhead costs required to make a product.

The income statement also lists sales, general and administrative (SG&A) expenses. They reflect functions, such as marketing and payroll, that support a company’s production of products or services. Often, SG&A costs are relatively fixed, no matter how well your business is doing. Calculate the ratio of SG&A costs to revenue: If the percentage increases over time, business may be slowing down.

Assets, liabilities and net worth

The second component is the balance sheet. It tallies your assets, liabilities and net worth to create a snapshot of the company’s financial health on the financial statement date. Assets are customarily listed in order of liquidity. Current assets (such as accounts receivable) are expected to be converted into cash within a year. Long-term assets (such as plant and equipment) will be used to generate revenue beyond the next 12 months.

Similarly, liabilities are listed in order of maturity. Current liabilities (such as accounts payable) come due within a year. Long-term liabilities are payment obligations that extend beyond the current year.

True to its name, the balance sheet must balance — that is, assets must equal liabilities plus net worth. So, net worth is the extent to which assets exceed liabilities. It may signal financial distress if your net worth is negative.

Other red flags include current assets that grow faster than sales and a deteriorating ratio of current assets to current liabilities. These trends could indicate that management is managing working capital less efficiently than in previous periods.

Inflows and outflows of cash

The statement of cash flows shows all the cash flowing in and out of your business during the accounting period.

Cash inflows typically come from selling products or services, borrowing and selling stock. Outflows generally result from paying expenses, investing in capital equipment and repaying debt. The statement of cash flows is organized into three sections, cash flows from activities related to:

Operating,
Financing, and
Investing.

Ideally, a company will generate enough cash from operations to cover its expenses. If not, it might need to borrow money or sell stock to survive.

The good and the bad

Sometimes business owners get into the habit of thinking of their financial statements as a regularly occurring formality performed to satisfy outside parties such as investors and lenders. On the contrary, your financial statements contain a wealth of data that can allow you to calculate ratios and identify trends — both good and bad — affecting the business. For help generating accurate financial statements, as well as analyzing the information therein, please contact us.

Back to industry updates

The term “The Great Resignation” has become very fashionable over the last several months as a way to describe the rising trend of employees quitting their jobs. Across many different industries, companies of all sizes are struggling to maintain and staff their workforce during ‘The Great Resignation.’ According to the Wall Street Journal, in the first 10 months of 2021, America’s workers handed in nearly 39 million resignations – the highest number since tracking began in 2000. Data just released by the U.S. Labor Department for November added another 4.5 million workers who quit their jobs – a new record high for resignations in a single month. That means that 3% of all American workers voluntarily left their positions in November alone.

The truth is, the ‘Great Resignation’ is more than people simply quitting and walking away. What we are seeing is huge numbers of employees moving around within the job market, rather than just leaving it altogether. These workers are looking for a better work-life balance and making deliberate choices as to where their careers are heading next. “People are finding jobs that give them the right pay, benefits and work arrangements in the longer term,” says Anthony Klotz, the Texas A&M University organizational psychologist who coined the term ‘Great Resignation.’

While burnout – long an issue for American workers – is seen as the primary cause of ‘The Great Resignation,’ it is not the only factor. The pandemic has made employees change their priorities and rethink their work expectations. These “pandemic epiphanies,” as Klotz calls them, have helped many people change what they want to get, and eventually, what they actually do get, out of work.

Businesses need to react, as this trend does not appear to be slowing down. Employers know that it takes significantly longer to recruit and train someone than it does for that person to give their two-week notice and depart. The obvious solution is that most businesses need to consider bolstering their retention efforts of current employees. A recent Harvard Business Review article highlights six measures that can have a consequential impact on retaining employees:

1. Incentivize Loyalty

Re-evaluate your employee compensation packages and ensure it compares to industry standards. If an employee feels like they are not being paid well for the work that they do, the current employment climate makes it is easier than ever to seek higher-paid opportunity elsewhere. Most employees believe in loyalty, but they want their business leaders to believe in it too.

2. Provide Opportunities to Grow

Forward-thinking organizations have been doing retention interviews over the past months — asking each employee what it would take for them to stay. Show current employees that you value them even more than potential new hires by providing them with new opportunities to grow and advance.

3. Give Employees a Sense of Purpose

Purpose is the reason your organization exists, and it’s the reason people choose to join and stay. Recent research from McKinsey confirms that the top two reasons employees cited for leaving were that they didn’t feel their work was valued by their organization (54%), and that they lacked a sense of belonging at work (51%). Employees want to feel that what they do matters, and that begins by shifting your culture to one where people believe in the work they are doing.

4. Prioritize Connections

Make time to connect and build relationships with your people. Social connections have a significant impact on productivity and employees routinely place a higher priority on having a good relationship with coworkers than on many other job attributes.

5. Take Care of your Employees and their Families

Provide mental health resources, subsidize day care, and give more paid time off. Providing these benefits will easily outweigh the cost of hiring and training new employees.

6. Embrace Flexibility

The future of work is going to be flexible work environments in terms of location, hours and job description. If you can, now is the time to embrace it. It may even be helpful to have employees form teams to provide input on what their future work should look like. When people help build their dream home, they want to live in it.

‘The Great Resignation’ is a cultural phenomenon created by the pandemic and it is impacting businesses across the country. The benefits of the measures listed above will not only help you retain good employees, it will make your business more attractive to new hires as well. Don’t resign yourself to the continuing tide of resignations and the constant struggles of recruitment. Decisive action is what’s needed, and we’re here to help.

Back to real estate right now

Roth&Co’s latest video series: Real Estate Right Now.

Presented by Alan Botwinick and Ben Spielman, co-chairs of the Roth&Co Real Estate Department, this series covers the latest real estate trends and opportunities and how you can make the most of them. This episode discusses more critical valuation metrics used to calculate the potential of an investment property.

Watch our short video:

In our last video we talked about three useful tools to help calculate the potential of an investment property: GRM (Gross Rent Multiplier), PPU (Price Per Unit) and Cap Rate (Capitalization Rate). Moving forward, here are additional metrics that can help an investor dig even deeper.

IRR

The Internal Rate of Return (IRR) is a metric used in financial analysis to estimate the profitability of a potential investment. It represents the annual rate of return on your investment, over the life of that investment. The higher the IRR, the healthier the return.

The IRR is calculated by computing the net present value of the investment. The Net Present Value (NPV) is the amount that the investment is worth in today’s money. To successfully analyze the data, future values must be considered against today’s values. Why? Because today’s money is more valuable than the value of the same money later on. This is also known as the time value of money.

When we calculate the IRR, we solve for “a rate”, so that the Net Present Value of the cash outflows and inflows is zero. That “rate” is the IRR. We achieve this by plugging in different interest rates into our IRR formula until we figure out which interest rate delivers an NPV closest to zero. Computing the Internal Rate of Return may require estimating the NPV for several different interest rates. The formulas are complex, but Microsoft Excel offers powerful functions for computing internal return of return, as do many financial calculators.

Simplified, here is how it works:

If you invest $10,000 in year one and receive an $800 return annually through Year 5, then exit the investment for $15,000, you would calculate the IRR as follows:

This scenario yields an IRR of 18%.

Here’s a similar scenario that yields a different result:

This scenario yields an IRR of 15%

Which scenario provides a better return? Looking at the bottom line is deceptive. By calculating the IRR for both investments, you would see that the IRR on the second investment, 15%, is a nice return. However, the first investment, with an 18% IRR, would be a better use of your money.

CoC Return

The Cash-on-Cash Return tells the investor how much cash the investment will yield relative to the cash invested. It measures the annual return the investor made on a property after satisfying all debt service and operating costs. This is a helpful analytic for many real estate investors who commonly leverage investments by taking out mortgages to reduce their cash outlay. The metric is the most helpful when liquidity during the investment period is important to the investor. One of the most important reasons to invest in rental properties is cash flow, and Cash-on-Cash return measures just that. Put simply, Cash-on-Cash return measures the annual return the investor made on the property after satisfying all debt service and operating costs.

Here is a simple CoC Return example:

Let’s say you buy a multifamily property for $200,000, putting down a $40,000 deposit, and assuming a $160,000 mortgage. Your gross rents are $30,000 monthly, with $20,000 of operating expenses. Additionally, you have $9,000 monthly debt service payment comprised of $7,000 interest and $2,000 principal. Because principal payments are not an expense, Net income is $3,000 annually.

However, when calculating Cash-on-Cash, you consider the debt service as well, bringing your return to $1,000 monthly, or $12,000 annually.

Comparing your investment’s yearly net income of $12,000 to the $40,000 down payment, you have a Cash-on-Cash annual return of 30%. While there is no specific rule of thumb for what constitutes a good return rate, the general consensus amongst investors is that a projected Cash-on-Cash return between 8% to 12% implies a worthwhile investment.

Financial metrics are important and useful tools that can help an investor make smart, informed decisions. Whereas any one metric may have limitations, by considering a combination of metrics commonly used for comparing, in addition to tracking performance or value, an investor can target a strategy and analyze risk in a potential investment opportunity.

This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

Back to industry updates

Management needs timely, accurate feedback to guide operating decisions, anticipate problems and take advantage of emerging opportunities. Unfortunately, comprehensive financial statements take a long time to generate. Reporting key performance indicators (KPIs) on a monthly or weekly basis is a simplified alternative to gauge performance in real time.

Popular financial metrics

KPIs measure an organization’s progress toward its objectives. However, with so many metrics to choose from, data overload can easily happen. That’s why your KPI report should be customized and streamlined to cover the metrics that are the most critical to your success.

KPIs differ from one company to the next based on the industry and the company’s objectives. Common examples include:

Operating cash flow. This helps management evaluate how much cash is available for immediate spending needs. Poor cash flow, not slow sales or lagging profits, is one of the leading causes of business bankruptcy.

Return on assets. This metric equals net income divided by total assets. It measures how effectively your company is managing its assets to generate earnings.

Inventory turnover. The number of times inventory is converted into sales is usually computed by dividing cost of goods sold by the average inventory balance. This tells you how efficiently you’re “selling through” inventory. Many companies waste valuable cash by allowing slow-moving inventory to sit idle on their shelves for too long.

KPIs can also be industry specific. To illustrate, auto dealers might compare new vehicle sales to used vehicle sales; contractors might focus on the bid-hit ratio; and hospitals might want to know the average wait time in the emergency room or the bed occupancy rate in the intensive care unit.

Beyond the numbers

Many companies also include nonfinancial metrics in the areas of customer service, sales, marketing and manufacturing. However, nonfinancial KPIs must be both specific and measurable.

For instance, just saying that your company wants to “provide better customer service” doesn’t produce a sound KPI. Instead, if your goal is to improve response time to customer complaints, a relevant KPI might be to provide an initial response to complaints within 24 hours, and to eventually resolve at least 80% of complaints to the customer’s satisfaction.

Benchmarking results

A basis of comparison is important when reviewing KPIs. Benchmarks will provide a standard against which you can compare to see how your KPIs stack up. You can benchmark your current KPIs against historical results or averages published in trade publications.

This will help you spot trends and identify potential problems, allowing you to deal with them before they worsen. For example, if your accounts receivable days are lengthening, it might indicate that your collections are lagging and a cash flow crunch is looming.

Unlocking the keys to success

During the pandemic and the ensuing economic turmoil, tracking relevant performance metrics is more important than ever. Threats and opportunities abound — and new ones seem to arise quickly. We can help you tailor your KPI report to meet your business needs, as well as find meaningful benchmarks based on current market conditions.

Inflation’s Impact on the Market

Smooth Sailing: Tips to Speed Processing and Avoid Hassles This Tax Season

Let Your Financial Statements Guide You to Optimal Business Decisions

Navigating ‘The Great Resignation’

Video: Real Estate Right Now | Valuation Metrics (Part 2)

KPIs: What Are They, and Which Ones Count?