贝恩－业绩评估-CORPORATEPERFORMANCEMEASUREMENT.ppt

Author: Patrick Cote Contributors: Kate McGreevy Julian Critchlow bc Corporate Performance Measurement April 1999 Copyright 1999 Bain Invested capital = All debt equity invested in format at book value; WACC = Weighted average cost of capital ROIC = Return on invested capital = (NOPAT / invested capital) also known as: Return on Net Assets (RONA) or Return on Capital employed (ROCE) EP can be calculated beginning with either profits, NOPAT, or returns, ROIC, depending on the availability of data. The NOPAT method is more commonly used EP Calculation Using ROICUsing NOPAT EP = NOPAT - Capital ChargeEP = (ROIC - WACC) * Invested Capital Spread between what is achieved and what is required Invested Capital * WACC Discount Rates - Framework Economic Profit 59CorporatePerformanceMeasurement bc Corporate Performance Measurement LON * May be referred to as Return on Capital (ROC) or Return on Investment (ROI) There are two different frames of reference for calculating the “economic value” of any business - analogous to the perspectives used in ROI and ROE analysis Total Capital PerspectiveEquity Capital Perspective Banks and ShareholdersShareholders EP = NOPAT - (Assets x WACC) . the “profitability“ of the business from the frame of reference of the debt and equity holders “. profitability“ of the business from the frame of reference of the equity holders Opportunity cost of the (blended) debt and equity capital Opportunity cost of the equity capital “Profitability“ is measured as income earned less the opportunity cost of total capital invested “Profitability“ is measured as income earned less the opportunity cost of equity capital invested Stakeholder: EP definition: Perspective: . . . given that, what is the frame of reference? Accordingly: Performance Measurement Linkages: - Ratio: - EP: Total Capital Spread = ROA - WACC EP = Total Capital * (ROC-WACC) Equity Capital Spread = ROC - Ke EP = Equity Capital * (ROC-Ke) Return on Assets (ROA)*Return on Equity (ROE) Key Ratio: Discount Rates - Two Different Definitions of EP Economic Profit 60CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Discount Rates Calculate WACC Calculate Firm Tax Rate Calculate Industry Average for Unlevered b Determine Appropriate Market Risk Premium Determine Market Value of Debt and Equity Determine Appropriate Cost of Debt, KD Re-Lever Target Leverage for your Firm to Calculate Ke Use 10 year T-Bond or 30 Year T-Bond less liquidity premium (of 1.7% for US) for appropriate country Only use government bonds if little or no risk of default for country in question Use long-term average of difference between expected market rate of return and risk- free rate E(Rm) - Rf For US, Copeland, Koller and Murrin recommend 5% to 6% based on geometric average from 1926-1993 Find comparable firms for industry in question and unlever b based on formula* Use average of bu of comparable firms Use target leverage in formula* to calculate bL Once bL calculated, use CAPM formula Ke = Rf + bL E(Rm) - Rf to calculate Ke KD is not necessarily equal to coupon rate of bond (e.g. IBM 2005 7.5% does not necessarily have KD = 7.5% Must calculate or obtain yield on outstanding debt If not available, use KD of firms with similar rating from agencies such as Moodys or S the period- to-period change flows through the income statement Note: NOPAT is net of depreciation; depreciation is considered a true conomic expense because assets need to be replenished Source: The Quest for Value Additions to Book Capital: Equity equivalents Additions to NOPAT: Change in Equity Equivalents Deferred Tax Reserve LIFO Reserve Other Reserves Cumulative Goodwill Amortisation Unrecorded Goodwill (Net) Capitalised Intangibles Full-Cost Reserve Cumulative Unusual Loss (Gain) after Tax Increase (decrease) in Reserves Eliminate Goodwill Amortisation Increase in (net) capitalised intangibles Increase in full-cost reserve Unusual loss (gain) after tax Non-capitalised leases are capitalised and form debt equivalents; the interest expense is added back to NOPAT Accounting Adjustments - Stern Stewarts Mechanics Economic Profit 64CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Source: INSEAD Is it likely to have a material impact on EP? Can managers influence the outcome? Can operating managers understand it? Is the required information relatively easy to track or derive? If the adjustment is made, will manager behaviour improve ? The following five criteria should be used to determine whether an adjustment should be made Basic Principle: Eliminate distortions to the extent that it is practical to do so Economic Profit Accounting Adjustments - Selection Criteria 65CorporatePerformanceMeasurement bc Corporate Performance Measurement LON The following short-cut approach provides a quick means of calculating EP, but does not include the appropriate adjustments Operating Income (EBIT) +Interest Income +Equity Income (or - equity loss) +Other Investment Income - Cash operating taxes - Tax shield on interest* =Net Operating Profit After Tax (NOPAT) Total Assets - Short-Term Non-Interest Bearing Liabilities (ST NIBL)* =Invested Capital (IC) Average IC = (IC Beginning + IC End) 2 Note: Sometimes IC Beginning, not IC Average used NOPAT - Capital Charges (Average IC * Cost of Capital) =EP * Operating income x marginal statutory tax rate (gives no credit for tax shield on interest) * STNIBL = Current liabilities less all interest bearing liabilities, such as short-term notes payable Source: INSEAD Economic Profit Short-Cut Approach (Excludes Adjustments) 66CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Agenda Economic Profit Definition Advantages/Disadvantages Framework Use in Strategy Work 67CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Use in Strategy Work EP works effectively for manufacturing companies, but is generally not appropriate for service firms Manufacturing SectorService Sector Use of EP/MVA Capital - intensive industries benefit most from EP forces managers to consider capital invested in business e.g. Coca-Cola spinning off bottlers UDV spinning off wine production assets to focus on blending EP generally not appropriate due to difficulty in measuring human capital (typically most valuable asset) Structure of balance sheet precludes use of EP in Financial Services sector Economic Profit 68CorporatePerformanceMeasurement bc Corporate Performance Measurement LON An organisation needs to establish the optimum level of information complexity in order to create the most value Optimum level of adjustment and analysis will be determined by: Absolute sensitivity of value measures to adjustments Level of the organisation that is using the (economic value added) information Strategic use of information Ability of management to make decisions on the information Value to the Organisation* Level of Complexity (Adjustment and Analysis) Optimal Adjustments and Analysis Organisation below full potential as a result of too simplistic a measurement/ decision making process Diminishing value to organisation as cost of adjustment/analysis Outweighs incremental gain on decisions made Maximum value to organisation from economic value-added Note: Value defined as incremental value created from management decision less cost of the information base/decion making process Economic Profit Optimum Information Level 69CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Use in Strategy Work EP can be improved in a number of ways Improving EP Achieving economically profitable growth Exiting uneconomic activities Raising the efficiency of current operations Generating incremental gains in EP from existing capital investments Generating incremental positive EPs from new capital investments Immediate exit from activities generates proceeds subsequent cash flow foregone Economic Profit 70CorporatePerformanceMeasurement bc Corporate Performance Measurement LON The following guidelines should be considered when setting up EP Link to Compensation Keep it Simple Senior Managers should be both evaluated and compensated based on their EP results Aligns incentives of Shareholders and Management Use change in EP as basis for evaluation to incent managers to create additional value The more complex the EP system is, the less likely it is to be used Accounting adjustments must be sufficient to eliminate major distortions from economic value, but not too complicated for management to understand or utilise on long-term basis Economic Profit Guidelines 71CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Agenda Executive Summary Objectives Background Performance Measurement Framework Market Value Added (MVA) Economic Profit (EP) Cash Flow Return on Investment (CFROI) Exercises MVA Economic Profit Case Study - Diageo 72CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Cash Flow Return on Investment (CFROI), also known as the Holt method, is a return on investment measure that adjusts for deficiency in typical IRR calculations CFROI uses cash flows and investments stated in constant monetary units Once calculated, CFROI compared to benchmark, the firms cost of capital to evaluate management performance Two firms use the Holt Method Holt Value Associates, LP for portfolio management BCG/Holt for Corporate Management CFROI is an adjusted IRR that is compared to the firms WACC CFROI Definition 73CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Determine average life of firms assets Approximate by median of Gross Plant Depreciation Expense over last 3 years Calculate Life of Assets Calculate Gross Cash Investment Calculate Sum of Non Depreciating Assets Calculate CFROI Calculate Gross Cash Flow Compare CFROI to Benchmark Cash Flow Return on Investment - CFROI Framework (1 of 6) CFROI 74CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Start with Net Income (after taxes) Add back non cash operating expenses Add back financing expenses Use monetary inflation adjustment to restate in current dollars Calculate Life of Assets Calculate Gross Cash Investment Calculate Sum of Non Depreciating Assets Calculate CFROI Calculate Gross Cash Flow Compare CFROI to Benchmark Cash Flow Return on Investment - CFROI Framework (2 of 6) CFROI 75CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Gross up book assets with accumulated depreciation of value of operating bases Discount operating leases over life of assets period using real rate of interest of firms debt Calculate Life of Assets Calculate Gross Cash Investment Calculate Sum of Non Depreciating Assets Calculate CFROI Calculate Gross Cash Flow Compare CFROI to Benchmark Cash Flow Return on Investment - CFROI Framework (3 of 6) CFROI 76CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Terminal value consists of non depreciating assets, including: land net working capital investments in marketable securities Use inflation adjustment to restate in current dollars Calculate Life of Assets Calculate Gross Cash Investment Calculate Sum of Non Depreciating Assets Calculate CFROI Calculate Gross Cash Flow Compare CFROI to Benchmark Cash Flow Return on Investment - CFROI Framework (4 of 6) CFROI 77CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Calculate CFROI using IRR methodology: Present Value = Gross Cash Investment Payments = Gross Cash Flow Future Value = Sum of Nondepreciating assets Number of Periods = Life of Assets Calculate Life of Assets Calculate Gross Cash Investment Calculate Sum of Non Depreciating Assets Calculate CFROI Calculate Gross Cash Flow Compare CFROI to Benchmark Cash Flow Return on Investment - CFROI Framework (5 of 6) CFROI 78CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Use firms cost of capital (WACC) for benchmark Must restate WACC in real terms to be able to compare to CFROI Calculate Life of Assets Calculate Gross Cash Investment Calculate Sum of Non Depreciating Assets Calculate CFROI Calculate Gross Cash Flow Compare CFROI to Benchmark Cash Flow Return on Investment - CFROI Framework (6 of 6) CFROI 79CorporatePerformanceMeasurement bc Corporate Performance Measurement LON EP Calculate Life of Assets Calculate Gross Cash Investment Calculate Sum of Non Depreciating Assets Calculate CFROI Calculate Gross Cash Flow Compare CFROI to Benchmark Add back goodwill amortisation Adjust tax expense to actual cash taxes Add back interest portion of operating rental expenses Add back accumulated goodwill Only use assets net of depreciation WACC in nominal terms Target Audience Methodology Management External Investors NPV Cash Flow Return on Investment - EP/CFROI Differences (1 of 2) CFROI 80CorporatePerformanceMeasurement bc Corporate Performance Measurement LON CFROI Calculate Life of Assets Calculate Gross Cash Investment Calculate Sum of Non Depreciating Assets Calculate CFROI Calculate Gross Cash Flow Compare CFROI to Benchmark Add back goodwill amortisation + depreciation No tax expense adjustment Add back operating rental expenses Accumulated goodwill is normally not added back Assets grossed up for accumulated depreciation WACC restated in real terms Target Audience Methodology External Investors IRR Cash Flow Return on Investment - EP/CFROI Differences (2 of 2) CFROI 81CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Agenda Executive Summary Objectives Background Performance Measurement Framework Market Value Added (MVA) Economic Profit (EP) Cash Flow Return on Investment (CFROI) Exercises MVA Economic Profit Case Study - Diageo 82CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Source: Harnischfegers 1996 Annual Report, INSEAD 47,598,340 common shares outstanding Market Value of common shares: $40 Since Market Value of debt and minority interest not reported assume market value = book value Assume operating cash equal to 1% of total sales Information Required: Exercise:Calculate Harnischfegers MVA at October 31, 1996 MVA Exercise Market Value Added Exercise (1 of 3) 83CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Source: Harnischfegers 1996 Annual Report, INSEAD Dollars amounts in thousands19961995 Assets Current Assets Cash and cash equivalents36,936239,043 Accounts receivable net667,786499,953 Inventories 547,115416,395 Business held for sale 26,152 - Other current assets132,2657,999 1,410,2501,213,390 Property, plant and equipment Land and improvements48,37131,571 Buildings301,010233,788 Machinery and equipment776,332676,546 1,125,713 941,905 Accumulated depreciation(491,668)(454,249) 634,045 487,656 Investments and other assets Goodwill512,693147,943 Intangible assets39,17366,796 Other assets93,868124,982 645,734339,721 $2,690,029$2,040,767 Harnischfeger Industries Inc. Consolidated Balance Sheet - Year Ended 31 October 1996 Market Value Added Exercise (2 of 3) MVA Exercise 84CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Source: Harnischfegers 1996 Annual Report, INSEAD Harnischfeger Industries Inc. Consolidated Balance Sheet - Year Ended 31 October 1996 Liabilities and Shareholders Equity Current Liabilities: Short-term notes payable49,63322,802 Trade accounts payable346,056263,750 Employee compensation and benefits160,488100,041 Advance payments and progress billings155,199154,401 Accrued warranties50,718 43,801 1,077,127723,303 Long-term obligations 657,765459,110 Liability for post retirement benefits 78,814101,605 Accrued pension and related costs 39,90252,237 Other liabilities 14,364 20,820 Deferred income taxes54,920 34,805 Minority Interest 188,000209,467 Shareholders Equity: 93,65289,611 Common stock 51,407 51,118 Capital in excess of par value615,089603,712 Retained earnings148,175 53,560 Cumulative translation adjustments(37,584) (42,188) Less:Stock Employee Compensation Trust Treasury Stock (42,242) (46,513) 673,485559,276 $ 2,690,0292,040,767 (61,350) (60,483) Other Liabilities: Other current liabilities 315,033138,508 Market Value Added Exercise (3 of 3) MVA Exercise 85CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Harmishfegers market value at 31 October, 1996 was $2,704.984 M Market Value ($ M) Market Value Added - Solution (Market Value) MVA Exercise 86CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Harnishfegers excess cash at October 31, 1996 was $8,296 M Amount ($ K) Market Value Added - Solution (Excess Cash) MVA Exercise 87CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Harnischfegers working capital requirements at October 31, 1996 were $374.46 M Amount ($ K) Working Capital Requirements Market Value Added - Solution (Working Capital Requirements) MVA Exercise 88CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Harnischfegers net fixed assets at October 31, 1996 were $1.28 B Amount ($ Thousands) Net PP INSEAD Harnischfeger Industries Inc. Consolidated Balance Sheet - Year Ended 31 October 1996 Economic Profit Exercise Current Assets: Other current assets Business held for sale Inventories Accounts receivable - net Cash and cash equivalents 1,213,390 57,999 - 416,395 499,953 $239,043 1,410,250 132,261 26,152 547,115 667,786 $36,936 Other assets Intangible assets Goodwill EP Exercise 94CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Source: Harnischfegers 1996 Annual Report; INSEAD Liabilities and Shareholders Equity 1996 1995 $22,802 263,750 100,041 154,401 43,801 138,508 723,303 459,110 Long-term Obligations 78,814 101,605 52,237 20,820 34,805 209,467 89,61