• When one is reviewing return on capital employed (ROCE) it is easy to forget the costs associated with disposal or acquisition of assets. Hence the need to ‘sweat  assets’ and ensure they are fully employed. If this is not undertaken rigourously then profits could decrease, asset cost base increase and affect the credit rating as shown below:

    Deutsche Bank upgraded Tata Motors (NYSE: TTM) from Sell to Hold 26th April 2013.

    Analyst Srinivas Rao said, “Our prior rating was underlined by an expectation of flat-to-falling margins from rising competition and lower ROCE due to higher capex. In our view, the stock performance (-7% YTD) reflects the negative margin surprise and higher capex guidance. JLR’s medium-term prospects are positive but the costs of emission compliance are likely to constrain EPS growth and ROCE.”


    Posted on: April 24, 2013 by: CashPerform

    Defined as Profit or Earnings before interest and tax PLUS Depreciation and Amortisation (as they are NON cash charges to the P & L account) less changes in working capital (Current assets less current liabilities) less Capital Expenditure in prior periods.

    Because free cash flow is a non-Generally accepted accounting principle (GAAP) or IFRS financial measure, companies that use this metric are required to disclose how it is calculated.

    Free Cash Flow vs. Net Income

    Free cash flow is used by some instead of (or in conjunction with) the net income as a measure of a company’s overall profit. As its name implies, free cash flow is calculated on a purely cash basis whereas net income is calculated on an accrual/prepayment basis in accordance with GAAP.

    Arguments for and against

    Proponents of free cash flow argue that free cash flow is harder to manipulate than net income since it isn’t subject to accounting shenanigans. However, free cash flow can also be manipulated by delaying items such as capital expenditures.

    Posted on: April 23, 2013 by: CashPerform

    Reporting of Return on Capital Employed (ROCE)

    Defined as Profit or Earnings before interest and tax divided by shareholders funds plus creditors more than one year (this being the equivalent of Total assets less current liabilities)

    The challenge is to understand the impacts on profit and by whom. Once this can be determined then one can turn attention to the other interdependent parts of the formulae. Strategy could deliver shareholders’ funds and creditors more than one year. However the major thrust for most local accountants, management teams will be in the purchasing with an emphasis on return on investment and valuation of a) Fixed assets and the valuation (including reserves) of B) current assets like debtors, stock and work in progress. Current liabilities, particularly creditors (suppliers) will require certification (self-approval via web portal and categorisation (criticality to the business) and then classification (metrics re Service level agreements, KPI’s and payment profiles)

    One could sweat capital items like fixed assets (equipment, buildings and land) and consume ones current assets like stock, wip, and debts especially when appreciating the full utilisation of assets within the ratio ROCE (return on capital EMPLOYED). People/employees could be regarded as Human Capital and in service industries one can obtain a return on human capital employed by attributing asset likes Pcs to individuals and charging them the costs so that they generate revenue to offset these costs on a person by person basis. ROI by person is then a measure that could be used to gauge the productivity of people.

    Posted on: April 18, 2013 by: CashPerform

    Credit agencies and credit reports seem to generate the usual DSO, DPO and inventory/stock turnover ratios without much thought about whether they ‘reasonable’. Are they correctly portraying a picture of how the organisation is generating and utilising its cash? Our experience and knowledge indicates few organisations are reviewing this data which can change due to seasonal fluctuations, reserves, system generated revenue and a number of other critical factors. The result is an ever increasing  number of reports being produced by these credit groups that reflect comparisons to peers and sector averages that are again somewhat short of quality narrative. This could affect your credit rating at worst and the perception of suppliers and customers could be somewhat tainted.