Market ShareDoubling Assets
If we double the asset base, the net effect might look like this:
Assets Doubled To Emphasise Market Share
| ASSETS | LIABILITIES & OWNER'S EQUITY | |||
| Cash | $8,000 | Accounts Payable | $14,000 | 7.0% |
| Accounts Receivable | $27,000 | Current Debt | $24,000 | 12.0% |
| Inventory | $40,000 | Long Term Debt | $88,000 | 44.0% |
| Total Current Assets | $75,000 | Total Liabilities | $126,000 | 63.0% |
| Plant and equipment | $169,000 | Common Stock | $45,000 | 22.5% |
| Accum. Depreciation | ($44,000) | Retained Earnings | $29,000 | 14.5% |
| Total Fixed Assets | $125,000 | Total Equity | $74,000 | 37.0% |
| Total Assets | $200,000 | Total Liab. & O. E. | $200,000 | 100.0% |
Note the trade-offs with other performance measures. We are increasing assets, using a modest increase in equity and heavy leverage. Profits are zero. Dividends are zero. Stock is diluted.
The implications for other performance measures include:
- ROE: Falls because of low profits. May climb if some share is sacrificed near the end of the simulation.
- ROA: Same as ROE.
- Asset turnover: Likely stays neutral or falls slightly.
- Stock price: Falls. No increased book value. EPS is zero. Dividends zero. Shares diluted.
- Market cap: Falls. More shares at a lower price.
- ROS: Falls to zero.
- Cumulative profit: Falls to zero.
Of course, the company hopes to suddenly restore profits near the end of the simulation. If they can, all of the performance measures will turn sharply upwards in the end game. Further, in destroying their own profitability, they have also destroyed their competitors. If they can get “big” while competitors stay small (possible, since competitors would seek a profit) , they can sacrifice a small amount of share in the end game for a sizeable, albeit late, profit.
The board of directors will almost always impose other performance measures. Applying market share alone is a recipe for self-destruction. Used in concert with cumulative profit, management will feel schizophrenic, but will see a common theme of fast growth.