Agenda
− Value metrics
− Market value added
− Linking operations to value
2
Assessing your firm
Performance:
How much economic value has your firm created? Health:
How well positioned is it to create additional value in the future and what risks may prevent this?
Expectations:
Are the company’s capabilities and performance in line with the market’s expectations? 3
Look at a typical income statement
− ACCOUNTS FOR:
− Cost of Raw
Materials
− Cost of Production
Labor
− Cost of Management
Time
What is missing?
4
What is missing from traditional measures? −
− What happens if you treat something as “free”?
− Why should this cost be considered?
5
How do investors think?
− Suppliers of capital - stockholders and bondholders have several alternatives. − Consider Warren Buffet:
“I am in the capital allocation business. My job is to figure out which businesses to invest in, with whom and at what price. I am not a steel executive who can think only about how best to invest in steel.” − With investors like Buffet, how do you win the competition for capital? 6
Think like an investor
Today
?
$
$
Give $1.5 m to the manager for corporate investment in the project. In One Year
To get $ 2m
Same Risk
Investor
Which would the investor want?
Do-it-yourself:
How much do I need to invest in a similar risk financial market portfolio earning
R = 8%
To get $ 2m
2m/1.08 = 1.85 Value created by manager = 1.85-1.5
= 0.35 m
7
Need for a metric
− The best opportunities draw the most capital.
− These alternatives help establish the “opportunity set” by which your firm’s activities are measured.
− If you want capital, have to offer at least a return that investors could earn elsewhere in investments of equivalent risk - their opportunity cost of capital.
− You create wealth for investors only if you earn more than this benchmark rate of return.
− Need a yardstick which tells us whether we are doing this.
8
Economic Value Added
EVA = [Price of steel-Cost of steel] - [C * Space used]
Net
NetOperating
OperatingProfit
Profit
After
AfterTaxes
Taxes
Rental
Rentalcharge
chargefor foroffice officespace spaceused used
Rental
Rentalrate/square
rate/square meter meter
Payments
Paymentsto: to: --landlord
--landlord
Total
Totalsquare
square meters metersoccupied occupied ----Office
Office
----Warehouse
Warehouse
--municipality
--municipality
9
Economic Value Added
EVA = NOPAT - [C * Invested capital]
Net
NetOperating
OperatingProfit
Profit
After
AfterTaxes
Taxes
Amount
Amountofof
capital capitaltied tiedup upinin business business --Inventories
--Inventories
--Receivables
--Receivables
--Plant
--Plant&&
equipment equipment 10
Capital charge is not special
Revenues
- Material costs
- Labor costs
100
60
20
Revenues
- Taxes
10
Positive earnings 10
- Charge for capital 30
- Charge for capital
- Labor costs
- Taxes
Positive earnings
- Material costs
= negative EVA
= negative EVA
100
30
20
10
40
60
11
Charge for capital
− Rental rate * Amount of capital used
− rental rate for capital obtained from shareholders − rental rate for capital obtained from bondholders − blended average of rental rates: weighted average cost of capital
12
EVA formulations
1
EVA = NOPAT - [WACC x Invested capital]
Divide expression (1) by Invested Capital and multiply expression (1) by Invested Capital
2
EVA = [ROIC - WACC] x Invested capital
ROIC is return on invested capital; also known as
RONA = Return onNet Assets = Net Operating Profit after taxes/Net Assets
=
13
Key Value Drivers
− Value creation depends on
− Spread
− Volume of investment
− Duration of spread
14
Some examples
− Boeing Co.: ‘Sources of value’ study 2/99.
Assess how much each line of
The GQRS is a good indicator of other quality results. For the 2011 model year, we began reporting global GQRS TGW data. In previous years we had reported only North American region GQRS TGW data. In addition, we changed the GQRS survey to include additional questions on vehicle entertainment and information systems. Therefore, the 2011 results are not comparable to previous years. (Ford Motor Company, 2012) 2 The National Highway Traffic Safety…
Riordan, the supplier relationship utilizes outsourcing. Riordan partners with FedEx to ship parts and products. “Federal Express has one of the most advanced systems available for tracking items being sent through its services” (Jacobs & Chase, 2011 pg. 382). Having a company as reliable as FedEx and the services it offers is a great benefit for Riordan. Riordan can ship across the world and ensure that the customer will receive the product. Riordan is located in Hangzhou, China and ships across…
EXECUTIVE SUMMARY The existing metric used to calculate the bonuses for the Compass senior executive incentive plan is earnings before interest, taxes, depreciation and amortization, or EBITDA; the suggested alterative metric is Economic Value Added, or EVA. Per the request of CFO, Rodney L. Underdown, the following is an assessment on both metrics and a recommendation to use EVA as the target indicator that best represents the future growth of Compass. In recent years, 2011-2013, weather conditions…
Sustainability Through the Value Chain A Focused Study on Greening a Product Through the Various Stages of the Value Chain Greening an entire value chain within a company can seem like an overwhelming task, it’s important to prioritize where you can make the most impact and start with focused and more attainable goals to get going. This paper will cover the process of greening a company’s value chain, but through a smaller, more manageable scope: making a single product’s supply chain…
consultancy, training and even public speaking. The business was set up in 2011 by Emma Dalzell, who has nearly 20 years of experience through all of the marketing disciplines and has worked in senior roles for well-known brands such as Citibank, Vodafone, Cable and Wireless and E.ON. To be completed once report is completed. Contents Page 1. Marketing metrics 1.1 Definition 1.2 Role of marketing metrics 2. Types of technology used within Bare Bones Marketing 2.1 Customer Relationship…
Outlook for the future Using this information, would your invest in this company? Why? Microsoft’s Financial Reporting Strategy 1. What are the factors that likely explain the difference between Microsoft’s market value of equity and its reported book value of equity? 2. What effect did Microsoft’s software capitalization policy have on Microsoft’s income statement and balance sheet? 3. What effect did Microsoft’s revenue recognition policy have on its income statement and balance…
strategic plan and how those ethical considerations affect the company’s stakeholders. In addition, an analysis of how my own ethical considerations have changed in the course of taking the MBA program will also be discussed. Role of Ethics Core values and expectations the company has for its employees should be outlined in a company’s strategic plan. The ethical standards set forth in the strategic plan should embody the beliefs its upper management and customers hold dear. This is done by developing…
employees (whose value are real but could be delivered through alternative means, including outsourcing). Finally, there are the “noncore” segments (featuring skills that no longer serve the company’s capability requirements). See below graphics from page 12: Outline the functional expertise component of this strategy and how it optimizes the company’s ability to identify highly qualified individuals. According to the American Society for Training & Development (2011) “Successful talent…
Introduction Due to the increased awareness of the environmental issues, nowadays sustainability information has been seen as a major driver of companies’ value creation in the long term, leading to an increasing demand for the disclosure of their sustainability performance from stakeholders and the public society (Deloitte 2013). As a result, besides traditional financial reporting, companies have been encouraged to disclose sustainability information as well. This report will discuss the international…
