We often talk about pricing leverage and how just a little price improvement can dramatically impact the bottom line. While many companies are focused on cost reduction and driving revenue the greatest gain in margin lift comes from price improvement. Of course, depending on your current level of margin performance, price lift will have a different impact on your bottom line.
|Company||Net Income Gain|
|Ford Motor Company||4.3%|
Now consider the price/earnings ratio for these companies and what a 1% price improvement would mean for their market capitalization. Let’s take Coca Cola for example. Coke has a current P/E ratio of 19.43. With revenues of $46 billion a 1% price improvement would yield an income gain of $460 million. That would translate into nearly a $8.9 billion improvement in market capitalization. Not bad for a 1% price boost.
Privately held companies are typically valued lower than Coke’s P/E. But, you will still see a dramatic improvement in your company value.