The MHEDA Journal - First Quarter, 2018 - 80

MONEY

PROFIT PL ANNING

MATTERS

The Rule of 72:

Having the Assets to Support Future Sales
BY DR. ALBERT D. BATES, DIRECTOR OF RESEARCH,
PROFIT PLANNING GROUP

O

ne of the most interesting concepts in financial analysis is what is commonly called
the Rule of 72. It states that the number of years required to double the value of an
investment can be estimated by dividing the number 72 by the annual return on that
investment. For example an investment with a 7.2% annual return would double in

about ten years (72¸ 7.2 = 10).

This seemingly innocuous rule has
some very important implications for
distributors. Firms that produce a
higher level of return on their investment than typical firms can begin to
systematically build a larger asset base
quicker than the typical firm. They can
then use that asset base to generate
higher sales.
This report considers how different
rates of return result in very different
businesses in the future. It does so by
examining two specific issues:
* The Different Rates of Return for
MHEDA Members - An analysis
of the long-term implications of
different profit levels.
* Moving to a Higher Return - An
examination of the requirements
for moving to higher-profit levels.

The Different Rates
of Return for MHEDA
Members
Exhibit 1 provides a comparison
of typical and high-profit MHEDA
80

MHEDA | themhedajournal.org

members. The top set of numbers is
for the typical member based upon
the latest DiSC report. The bottom set
of numbers is for the high-profit firm
in the same survey. To demonstrate
the impact of profitability on sales
potential over time, both firms are
assumed to start with the same level
of sales volume.
At present, the typical firm generates
$40,000,000 in sales, operates on a

One of the most interesting
concepts in financial analysis
is what is commonly called
the Rule of 72. It states that
the number of years required
to double the value of an
investment can be estimated by
dividing the number 72 by the
annual return on that investment.

gross margin percentage of 29.0% and
generates $980,000 in after-tax profits. These results require a total asset
investment of $19,000,000, producing
an after-tax return on assets of 5.2%.
Based upon the Rule of 72, the firm
would double its asset investment in
around 14.0 years if it reinvested all
of its profits.
In contrast, at the bottom of the
exhibit the high-profit firm generates
the same sales, but produces a profit
of $1,792,000 which yields an after-tax
ROA of 9.4%. The Rule of 72 indicates
it could double its asset base in only
7.6 years.
The final two columns of numbers
track the performance of the typical
and high-profit firm over time. The
numbers intentionally assume no
change in operating performance. This
provides a clear view of the implication of different levels of profitability
in the industry.
The first column of projected results
(Year 5) shows performance five years


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Table of Contents for the Digital Edition of The MHEDA Journal - First Quarter, 2018

Chairman’s Perspective
From the Desk of Liz Richards
Editor’s Note
MEET MHEDA’S 2018 BOARD OF DIRECTORS AND MBOA
MHEDA’S 2018 MATERIAL HANDLING BUSINESS TRENDS
Ask A MHEDA-NET Group
MHEDA Calendar
MHEDA MEMBER PROFILE
@WORK
WOMEN IN INDUSTRY
DISTRIBUTOR FORECAST
SUPPLIER FORECAST
MHI FORECAST
ITA FORECAST
CEMA FORECAST
ITR ECONOMICS FORECAST
2018 MHEDA CONVENTION SCHEDULE
THE RULE OF 72
New Members
Spotlight on Association News
MHEDA Milestones
Index to Advertisers by Product Category
Index of Advertisers by Alphabetical
The Last Word
The MHEDA Journal - First Quarter, 2018 - Intro
The MHEDA Journal - First Quarter, 2018 - cover1
The MHEDA Journal - First Quarter, 2018 - cover2
The MHEDA Journal - First Quarter, 2018 - 3
The MHEDA Journal - First Quarter, 2018 - 4
The MHEDA Journal - First Quarter, 2018 - 5
The MHEDA Journal - First Quarter, 2018 - 6
The MHEDA Journal - First Quarter, 2018 - 7
The MHEDA Journal - First Quarter, 2018 - 8
The MHEDA Journal - First Quarter, 2018 - 9
The MHEDA Journal - First Quarter, 2018 - 10
The MHEDA Journal - First Quarter, 2018 - Chairman’s Perspective
The MHEDA Journal - First Quarter, 2018 - 12
The MHEDA Journal - First Quarter, 2018 - From the Desk of Liz Richards
The MHEDA Journal - First Quarter, 2018 - 14
The MHEDA Journal - First Quarter, 2018 - Editor’s Note
The MHEDA Journal - First Quarter, 2018 - 16
The MHEDA Journal - First Quarter, 2018 - MEET MHEDA’S 2018 BOARD OF DIRECTORS AND MBOA
The MHEDA Journal - First Quarter, 2018 - 18
The MHEDA Journal - First Quarter, 2018 - 19
The MHEDA Journal - First Quarter, 2018 - 20
The MHEDA Journal - First Quarter, 2018 - 21
The MHEDA Journal - First Quarter, 2018 - 22
The MHEDA Journal - First Quarter, 2018 - 23
The MHEDA Journal - First Quarter, 2018 - 24
The MHEDA Journal - First Quarter, 2018 - 25
The MHEDA Journal - First Quarter, 2018 - MHEDA’S 2018 MATERIAL HANDLING BUSINESS TRENDS
The MHEDA Journal - First Quarter, 2018 - 27
The MHEDA Journal - First Quarter, 2018 - 28
The MHEDA Journal - First Quarter, 2018 - Ask A MHEDA-NET Group
The MHEDA Journal - First Quarter, 2018 - 30
The MHEDA Journal - First Quarter, 2018 - 31
The MHEDA Journal - First Quarter, 2018 - 32
The MHEDA Journal - First Quarter, 2018 - 33
The MHEDA Journal - First Quarter, 2018 - MHEDA Calendar
The MHEDA Journal - First Quarter, 2018 - 35
The MHEDA Journal - First Quarter, 2018 - MHEDA MEMBER PROFILE
The MHEDA Journal - First Quarter, 2018 - 37
The MHEDA Journal - First Quarter, 2018 - 38
The MHEDA Journal - First Quarter, 2018 - 39
The MHEDA Journal - First Quarter, 2018 - 40
The MHEDA Journal - First Quarter, 2018 - @WORK
The MHEDA Journal - First Quarter, 2018 - 42
The MHEDA Journal - First Quarter, 2018 - WOMEN IN INDUSTRY
The MHEDA Journal - First Quarter, 2018 - DISTRIBUTOR FORECAST
The MHEDA Journal - First Quarter, 2018 - 45
The MHEDA Journal - First Quarter, 2018 - 46
The MHEDA Journal - First Quarter, 2018 - 47
The MHEDA Journal - First Quarter, 2018 - 48
The MHEDA Journal - First Quarter, 2018 - 49
The MHEDA Journal - First Quarter, 2018 - 50
The MHEDA Journal - First Quarter, 2018 - 51
The MHEDA Journal - First Quarter, 2018 - 52
The MHEDA Journal - First Quarter, 2018 - 53
The MHEDA Journal - First Quarter, 2018 - SUPPLIER FORECAST
The MHEDA Journal - First Quarter, 2018 - 55
The MHEDA Journal - First Quarter, 2018 - 56
The MHEDA Journal - First Quarter, 2018 - 57
The MHEDA Journal - First Quarter, 2018 - 58
The MHEDA Journal - First Quarter, 2018 - 59
The MHEDA Journal - First Quarter, 2018 - 60
The MHEDA Journal - First Quarter, 2018 - 61
The MHEDA Journal - First Quarter, 2018 - 62
The MHEDA Journal - First Quarter, 2018 - 63
The MHEDA Journal - First Quarter, 2018 - 64
The MHEDA Journal - First Quarter, 2018 - MHI FORECAST
The MHEDA Journal - First Quarter, 2018 - 66
The MHEDA Journal - First Quarter, 2018 - 67
The MHEDA Journal - First Quarter, 2018 - ITA FORECAST
The MHEDA Journal - First Quarter, 2018 - 69
The MHEDA Journal - First Quarter, 2018 - 70
The MHEDA Journal - First Quarter, 2018 - 71
The MHEDA Journal - First Quarter, 2018 - 72
The MHEDA Journal - First Quarter, 2018 - CEMA FORECAST
The MHEDA Journal - First Quarter, 2018 - ITR ECONOMICS FORECAST
The MHEDA Journal - First Quarter, 2018 - 75
The MHEDA Journal - First Quarter, 2018 - 76
The MHEDA Journal - First Quarter, 2018 - 77
The MHEDA Journal - First Quarter, 2018 - 2018 MHEDA CONVENTION SCHEDULE
The MHEDA Journal - First Quarter, 2018 - 79
The MHEDA Journal - First Quarter, 2018 - THE RULE OF 72
The MHEDA Journal - First Quarter, 2018 - 81
The MHEDA Journal - First Quarter, 2018 - 82
The MHEDA Journal - First Quarter, 2018 - New Members
The MHEDA Journal - First Quarter, 2018 - Spotlight on Association News
The MHEDA Journal - First Quarter, 2018 - 85
The MHEDA Journal - First Quarter, 2018 - MHEDA Milestones
The MHEDA Journal - First Quarter, 2018 - 87
The MHEDA Journal - First Quarter, 2018 - Index to Advertisers by Product Category
The MHEDA Journal - First Quarter, 2018 - Index of Advertisers by Alphabetical
The MHEDA Journal - First Quarter, 2018 - The Last Word
The MHEDA Journal - First Quarter, 2018 - cover3
The MHEDA Journal - First Quarter, 2018 - cover4
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