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Breaking Down The PIA Ratios --Dickeson

May 2002
Each year in our printing industry we go through a little ritual akin to the rites of spring. It's called the PIA Ratios Studies. Printing Industries of America collects General Ledger Accounting Data from the prior calendar year from printing firms as a "survey." PIA commissions the H.R. Margolis Co. (Certified Public Accountants) to compile and analyze the data submitted, and then prepare reports for publication. For 2001, some 900 printers submitted their results in the "survey."

Survey firms reporting the top 25 percent of "Net Profits" are called the "Profit Leaders." Ronnie H. Davis Ph.D, chief economist of PIA, calls the remaining 75 percent the "Profit Challengers." In the February issue of this journal, Davis reports that the "Net Profits" of the Challengers were but six tenths of a percent of their sales.

As part of our rites of spring, we roll out the ashes and sack cloth and cry "Woe, Woe, Woe, is unto us! Have pity on our printing industry that sits on the doorstep reading Chapter X of the "Book of Bankruptcy."

Late Show Bits

Wait a damn minute, Horace. Last numbers I saw there were 45,000 printers in this country. We're somewhere in Dave Letterman's top five of American industries. Every year, year-after-year, we see those same dismal results. And, "We're Still Here" as the song goes. What's the real story, Mr. Davis?

For starters, these PIA numbers are "survey" data, not random sample results. Does that make a difference? Of course it does. We can't say that these results are "representative" of the 45,000-printer universe. Nine hundred printers, if randomly chosen, would provide a valid random statistic, but 900 volunteers do not. They're 900 companies willing to open their kimonos—sorta.

Secondly, we're talking "Net Profits" here. If you believe Net Profits mean something, please reveal all to me. Since Enron, Global Crossing and even before those disasters, net profits were a fantasy.

Mostly Ronnie Davis and the rest of us speak a language called EBITDA or some variant thereof. (Earnings Before Interest, Taxes, Depreciation and Amortization. Please note that the word "profits" has vanished.) Now the stock market doesn't believe that even EBITDA represents the value of a company so it multiplies EBITDA by a number called a P/E ratio—a "predictor" of future earnings—to arrive at a value of the equity of a company. Divide that result by the number of outstanding shares to determine a share value. What does that have to do with "Net Profits?" Nada.

Printing Universe

Thirdly, with a universe of 45,000 printers, we're talking small businesses here—family businesses. The last thing we want to do is pay taxes on income or otherwise. We're providing a living for dad, mom, kids and relatives (some of whom actually work in the shop and some who kinda work—now and again.) Net Profits means taxes. Net Profits and taxes are to be avoided—not evaded. Does this happen? Tell me something I don't know.

If you're a printing company with publicly held stock being traded on the open market you love Net Profits. They get converted to EBITDA and then multiplied by a P/E ratio to give you that lovely on-paper-millionaire feeling as you drive around in your leased Jaguar.

Now where are we in our annual rites of spring? Do we toss our PIA Ratios Studies in the trash? I wouldn't. They're all we've got. Some time ago, PIA and Margolis shifted to an emphasis on VA—Value Added. Very smart move. Value Added is sales less material, including buy-outs. It was a smart move, but PIA and Margolis apparently overlook just how canny they were by reporting both sales and materials to arrive at Value Added. Deduct materials from sales and all of the rest of the costs are the expenses of conversion—converting raw materials to printed products.

Trivial Differences

The relationship between price and raw materials is quite revealing. There's but trivial difference between "Profit Leaders" and "Profit Challengers" in almost any grouping. Value Added to raw materials, as perceived by print customers of the 900 reporting firms, is roughly the same for print leaders as print challengers in every grouping!

For example, for reporting firms with more than $15 million in sales, materials were 39.95 percent for leaders and 39.40 percent for all firms in the 2000 Studies. Reinterpreted, pricing by leaders and all firms was 2.5 times the cost of raw materials—the MM for Materials Multiplier—for companies at that sales level. Check it out.

Look at those PIA Ratios Studies as a Target Selling Price Guide. Select the Materials Multiplier shown for your classification. Figure the cost of materials for a prospective job. Multiply by your MM. That's your Target Selling Price. Move up or down in quoting from there, depending on the Customer's Value Perception and the likely competition.

No Magic Solution

Forget this Net Profit nonsense in the Ratios Studies and whether you're a public or private company, and that your lazy brother-in-law is on the payroll. At the Value Added level what difference does it make, anyway? Is this a magic solution? No way. It's a benchmark. Only a benchmark. We need decision support. That's what we're looking for in numbers. Just a bit of cold comfort for pricing. The PIA Ratios Studies provide an unexpected, unintended, benefit. Good stuff.

Years ago Peter Drucker said the three tasks of management are liquidity, productivity and tomorrow. We've learned the deceptions of job cost accounting and the irrelevancy of general ledger accounting. What's left? Cash. Do we have more than we started with? EBITDA measures earnings before interest and taxes, but those two are paid from cash. So let's name it just EBDA for earnings before depreciation and amortization.

We hear you, Peter.

We'll call our system KA-CHING for the sound of cash drawer liquidity. No, we'll name it ZOOM-O for the sound of printed throughput whistling out the door faster and faster.

Okay. It's EBDA-ZOOM-O-KA-CHING Graphic Arts Systems Inc. Now, how's that for your Website URL?

—Roger V. Dickeson

About the Author

Roger Dickeson is a printing productivity consultant based in Tucson, AZ. He can be reached by e-mail at, by fax at (520) 903-2295, or on the Web at

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