8 - Sustainability Flashcards
What is the definition of sustainability in a business context?
Longer-term business health.
What are the key short-term focuses for a distributor’s business model?
Moving products through working capital as fast and profitably as possible.
What long-term aspects should be monitored in a distributor’s business?
Fixed assets, long-term liabilities (such as loans), and capital structure.
What are RONA and ROCE used to measure?
Overall performance of a business.
What does RONA stand for?
Return on net assets.
What does ROCE stand for?
Return on capital employed.
What does ROIC stand for?
Return on invested capital.
What does ROIC focus on?
Operating components of the business model related to shareholders’ funds.
What is the significance of WACC in relation to ROIC?
Management must demonstrate that ROIC is higher than WACC to create value.
What is the weighted average cost of capital (WACC)?
Interest paid on capital invested at a rate adjusted for business risk.
What does value creation (VC) measure?
Profit in excess of the cost of the capital used to generate that profit.
What is another term for value creation?
Economic value added (EVA).
How is value creation calculated?
Operating profit after tax minus (Invested capital × WACC).
What does a negative value creation indicate?
Management has destroyed value.
What was ABC Co’s value destruction in year 1?
$48 million.
What is the importance of the VC tree?
It shows how different dynamics interact to impact overall value creation or destruction.
What was ABC Co’s ROIC in year 2?
6.4 percent.
What contributed to the improvement in ABC Co’s ROIC from year 1 to year 2?
Doubling NOPAT and reducing invested capital.
What is the impact of improving DPO on working capital?
Shifts the burden of financing extra working capital from shareholders to suppliers.
What does DSO stand for?
Days Sales Outstanding.
What is a key lesson learned from ABC Co’s experience?
Management must improve both profitability and capital management to create value.
How can managers at an operational level relate to value creation?
By understanding how their decisions impact income statements and balance sheets.
What does the analysis of customer profitability involve?
Measuring gross margin and contribution margin.
What are the two primary value drivers in customer analysis?
Contribution margin and cost to serve.
