Value Based Management ROIC evaluation of current activities

Transcription

1 Finance I Value Based Management ROIC evaluation of current activities Finance I Mini Tepper School of Business Carnegie Mellon Univerisy c2013 Bryan Routledge :45

2 Finance - Value Flow :: $13 billion... :: Corporations make investments decisions :: Business decisions that influence the current and future business cash flows :: Corporations make financing decisions :: Fund (pay) investment with debt, equity,... :: Investor cash-flows and returns depend on both decisions :: Investors choose portfolios that align timing and risk of cash flows with their preferences Value Based Management 3

3 Finance - Value Flow Value Based Management 4

4 Business Types :: Sole Proprietorship :: Partnership :: Corporation Value Based Management 5

5 Corporations Objective [Most of Meeting 2 is about this topic so more discussion is coming] :: In (most) Corporations the owners are different from the managers :: How is this feasible? :: Fisher separation and the NPV rule :: Value-based Management :: Benefits: :: Efficient risk sharing :: Liquidity :: Specialization of management Value Based Management 6

6 Value based management :: Goal :: The criteria to evaluate corporate decisions is value :: As measured by shareholder wealth :: Implement :: Project evaluation that measures the incremental impact of the project on shareholder value :: Net Present Value (NPV) :: Evaluate :: Financial statements :: Return on invested capital above the opportunity cost of capital :: Economic Profit Value Based Management 7

7 Market Value Added [This will look familiar from Base Camp] :: How much would it cost to buy AEO assets? :: How much would it cost to buy AEO business? :: Why the difference? Value Based Management 8

8 How much would it cost to buy AEO assets Source: 10K and Google s finance Value Based Management 9

9 How much would it cost to buy AEO assets Source: 10K and Google s finance Value Based Management 9

10 How much would it cost to buy AEO assets Source: 10K and Google s finance Value Based Management 9

11 How much would it cost to buy AEO assets Source: 10K and Google s finance Value Based Management 9

12 How much would it cost to buy AEO business? Value Based Management 10

13 How much would it cost to buy AEO business? Value Based Management 10

14 How much would it cost to buy AEO business? Value Based Management 10

15 How much would it cost to buy AEO business? Value Based Management 10

16 AEO business versus assets :: Market Value Added Value Based Management 11

17 What explains the Value Added? :: Accounting is historic = Assets recorded at purchase price :: Stock values are forward looking = Stock prices are the present value of future cash flows Value Based Management 12

18 What explains the Value Added? You do! Value Based Management 13

19 What explains the Value Added? You! :: Management (i.e., you!) :: This is why you pay (or not) a CEO :: Plus :: Business cycles :: Technology changes :: Luck Value Based Management 14

20 Value Based Management - Evaluation [This uses the AEO financial statements. They are printed at the end and at BB in XLS format. The spreadsheet also includes financial statements for ANF :: Did AEO have a good year? Value Based Management 15

21 Value Based Management - Evaluation Value Based Management 16

22 Value Based Management - Evaluation Value Based Management 16

23 Value Based Management - Evaluation Value Based Management 16

24 Value Based Management - Evaluation [This uses the AEO financial statements. They are printed at the end and at BB in XLS format. The spreadsheet also includes financial statements for ANF :: Return on Sales (Margins, Operating Efficiency) = NOPAT / Sales :: NOPAT is a measure of earnings :: sales and revenue mean the same thing :: Capital Efficiency = Sales / Invested Capital :: Return on Capital = NOPAT / Invested Capital Value Based Management 17

25 Value Based Management - Operating Efficiency :: The income statement reports sales and costs for the year. The cash flow reports on the movement of cash. Both of these tell us what happened with business in the year. :: Measures of business earnings :: (1) NOPAT = Amount of after-tax profit generated by the companys business operations :: (2) Free Cash-Flows = Amount of after-tax cash-flow generated by the company s business operations Value Based Management 18

26 Value Based Management - Operating Efficiency - NOPAT :: Net Operating Profit after Tax (NOPAT) = Amount of after-tax profit generated by the companys business operations Value Based Management 19

27 Value Based Management - Operating Efficiency - NOPAT :: Net Operating Profit after Tax (NOPAT) = Amount of after-tax profit generated by the companys business operations :: Start with EBIT or Earnings Before Interest and Taxes :: Interest expenses (income) are non-operating (financial) so we ignore them when evaluating operations. :: Financing costs are taken into account in the calculation of the cost of capital (discussed later). :: Taxes are a cost of doing business and should be taken into account when measuring operating performance. :: Since we are ignoring financial income and expenses we estimate taxes on EBIT Value Based Management 19

28 Value Based Management - Operating Efficiency - NOPAT Value Based Management 20

29 Value Based Management - Operating Efficiency - NOPAT Value Based Management 20

30 Value Based Management - Operating Efficiency - NOPAT Value Based Management 20

31 Value Based Management - Capital Efficiency :: Garbage pails Value Based Management 21

32 Value Based Management - Capital Efficiency :: Space is a scarce resource :: Income statement does not reflect cost of space :: Value depends on opportunity cost :: Opportunity cost hard to measure since it depends on opportunities Value Based Management 23

33 Value Based Management - Capital Efficiency :: Capital is a scarce resource :: Income statement does not fully reflect cost of capital :: Its Value depends on opportunity cost :: Opportunity cost measured using financial markets = The Opportunity Cost of Capital Value Based Management 24

34 Value Based Management - Capital :: Operating Capital = Capital Invested Value Based Management 25

35 Value Based Management - Capital :: Operating Capital = Capital Invested Value Based Management 25

36 Value Based Management - Capital :: Operating Capital = Capital Invested Value Based Management 25

37 Value Based Management - Capital :: What is the difference between working capital and PP&E? :: Inventory :: Building Value Based Management 26

38 Value Based Management - Return on Invested Capital :: Return on Invested Capital (ROIC) = NOPAT / Invested Operating Capital :: Earnings per unit of capital employed :: This ratio (or very similar versions) is also called Return on Net Assets (RONA) Return on capital (ROC) Value Based Management 27

39 Value Based Management - Return on Invested Capital Value Based Management 28

40 Value Based Management - Operating + Capital Efficiency :: Operating Efficiency and Capital Efficiency ROIC = NOPAT Invested Capital Value Based Management 29

41 Value Based Management - Return on Invested Capital Value Based Management 30

42 Value Based Management - Capital Efficiency :: You can look at capital efficiency item-by-item Example: Inventory Value Based Management 31

43 Value Based Management - Capital Efficiency :: You can look at operating efficiency and capital efficiency item-by-item :: To look at all items you need to look at the inverse of capital efficiency Sales Invested Capital = Sales AR + Inventory - AP + PPE +... Invested Capital Sales = = AR + Inventory - AP + PPE +... Sales AR Sales + Inventory Sales AP Sales + PPE Sales Value Based Management 32

44 Value Based Management - Capital Efficiency Value Based Management 33

45 Value Based Management - Evaluation Value Based Management 34

46 Value Based Management - Evaluation Value Based Management 34

47 Value Based Management - Evaluation :: Is ROIC big enough? Value Based Management 35

48 Value based management :: Market Value Added: = Use your assets to create more value than their cost :: Return on Invested Capital = Earnings per unit of capital = Operating Efficiency x Capital Efficiency = [ Earnings/Sales ] x [ Sales/Capital ] Value Based Management 36

49 Value based management - Overview Value Based Management 37

50 Value Based Management 38

51 Supplemental: Financial Statements for AEO and ANF Source: and 10K- See Blackboard for XLS (more years and also GPS) Value Based Management 39

52 Supplemental: Financial Statements for AEO and ANF Source: and 10K- See Blackboard for XLS (more years and also GPS) Value Based Management 39

53 Supplemental: Financial Statements for AEO and ANF Source: and 10K- See Blackboard for XLS (more years and also GPS) Value Based Management 39