Duke CE 2017 Global Productivity Awards Financial Cycle Time: A Metric to Measure Productivity April 20, 2017
Agenda Define Financial Cycle Time and its importance Explain the methodology behind rankings Reveal the rankings Question & Answer
Duke CE and Dialogue Mike Canning Global Head of New Businesses Duke Corporate Education Ben Walker Editor-in-Chief Dialogue Duke CE / 3
Our Team Joe Perfetti Lecturer, University of Maryland, College Park Adjunct Professor of Law, Georgetown University Michael Cichello Finance Professor, Georgetown University Adjunct Professor of Law, Georgetown University Gnomblei (David) Glazai Teaching Assistant Equity Analysis, University of Maryland, College Park Duke CE / 4
What is Financial Cycle Time? Financial Cycle Time measures the average time it takes to turn a dollar of investment into a dollar of sales Financial Cycle Time is a measure of the productivity and efficiency of the organization It uses the financial statements to measure productivity and the speed of the organization Financial Cycle Time can be a source of competitive advantage
Which of the following would you rather own? After Tax Margin on Every Sale Company A 9.5 cents 39 Company B 6.8 cents 305 Days to Make the Margin 6
Which of the following would you rather own? Margin Days ROIC Fuji Heavy Industries 9.5 cents 39 88.9 cents 6.8 cents 305 8.1 cents Fuji Heavy Industries 7
Key Value Drivers: Profitability x Productivity = ROIC Operating Profit Productivity Financial Cycle Time (Days) ROIC 20% 0.5 730 10% 10% 1.0 365 10% 5% 2.0 183 10% 3.3% 3.0 122 10% 2.5% 4.0 91 10% 2% 5.0 73 10% 1% 10.0 37 10%
Which of the following would you rather own going forward? 2016 Revenue After Tax Operating Profit Average Invested Capital Company A 25,560 7,020 1,477 Company B 21,220 2,770 7,938 9
Impact of Financial Cycle Time on Organic Growth: Speed as Competitive Advantage 2016 Revenue After Tax Operating Profit Average Invested Capital 25,560 7,020 1,477 21,220 2,770 7,938 Financial Cycle Time ROIC Invested Capital per Day Days of Advantage Invested Capital Saved 21 475% $70.3 m 116 $8,155 m 137 35% $57.9 m 10
How do you calculate Financial Cycle Time? Profit Sales Sales X = Invested Capital Profit Invested Capital 1. Invested Capital is a snapshot of the cumulative investment at a point in time 2. Sales are the annual sales of the company 3. When you divide Invested Capital by Annual Sales you get the percentage of a year it takes to sell the capital 4. Multiply by 365 to translate into days 11
Disruption Financial Cycle Time (Days) 122 87.5 30 Amazon has achieved the next level of productivity with its technology-driven direct distribution business model. Duke CE / 12
Two Views of ROIC Traditional ROIC Net Income + Interest and Financing Costs Operating ROIC EBIT x (1- Tax Rate) Assets Non Interest Bearing Liabilities (NIBL) Interest Bearing Liabilities (IBL) Invested Capital Operating Assets Operating NIBL Non Operating NIBL Interest Bearing Liabilities Equity Non Operating Assets Equity Traditional Invested Capital Operating Invested Capital 13-13 -
What are the Key Elements of Operating Invested Capital? Invested Capital Operating Invested Capital Operating Invested Capital w/o Goodwill Total Assets Less Non Interest Bearing Liabilities Working Capital Operating Cash Inventory Accounts Receivable Other Operating Current Assets Less Accounts Payable Less Operating Current Liabilities Working Capital Operating Cash Inventory Accounts Receivable Other Operating Current Assets Less Accounts Payable Less Operating Current Liabilities or Total Interest Bearing Liabilities Total Equity Net Property Plant and Equipment Less Long Term Operating Liabilities Goodwill and Intangibles Net Property Plant and Equipment Less Long Term Operating Liabilities Awards Based on IC w/o GW Duke CE / 14 How am I doing with all funds provided by investors? What total funds have I used to generate sales whether organic or acquired? What is the performance of my funds driving organic growth without premiums paid for acquisitions?
Methodology 2016 Data from the Bloomberg World Index of 5000 companies Key Assumptions: 1. USD Equivalent Revenue greater than $5 billion 2. Excluded Financial, Insurance, Real Estate and Utilities (separate ranking) 3. Excluded Companies listed in China (separate ranking) 4. 930 Companies used in rankings 5. Used an estimate for Average Operating Invested Capital from 2015 and 2016 fiscal years 6. Used 2016 reported Revenue 7. Overall Top 10 based on standard deviation from mean in industry Duke CE / 15
Biotechnology Pharmaceuticals Health Care Providers and Services Health Care Equipment and Supplies 21 DAYS 9 DAYS -72.6 DAYS 61.4 DAYS 27.5 DAYS 13.6 DAYS -45.5 DAYS 68.9 DAYS 37.8 DAYS 34 DAYS -43.6 DAYS 76.1 DAYS INDUSTRY = 60.9 DAYS INDUSTRY = 93.8 DAYS INDUSTRY = 35.6 DAYS INDUSTRY = 116.6 DAYS Duke CE / 16
Personal Products Beverages Food Products Textile, Apparel and Luxury Goods 40 DAYS -7.4 DAYS 46.2 DAYS 68.3 DAYS 46.3 DAYS 74.6 DAYS 54.5 DAYS 70 DAYS 65 DAYS 76.8 DAYS 55.6 DAYS 71.6 DAYS INDUSTRY = 56.0 DAYS INDUSTRY = 123.2 DAYS INDUSTRY = 116.6 DAYS INDUSTRY = 147.4 DAYS Duke CE / 17
Automobiles Airlines Aerospace and Defense -5.9 94.9 DAYS -77.3 DAYS -3.3 101.2 DAYS -46.8 DAYS Fuji Heavy Industries 36.4 DAYS 107.6 DAYS -6.4 DAYS INDUSTRY = 168.8 DAYS INDUSTRY = 187.8 DAYS INDUSTRY = 64.8 DAYS Duke CE / 18
Internet & Direct Marketing Internet Software and Services Software Communications Equipment -152.2 DAYS.9 DAYS -171.6 DAYS -77.9 DAYS -141.9 DAYS 111.9 DAYS -83 DAYS -9.3 DAYS -13.7 DAYS 135.1 DAYS -73.4 DAYS -5.9 DAYS INDUSTRY = -69.4 DAYS INDUSTRY = 82.7 DAYS INDUSTRY = -75.5 DAYS INDUSTRY = 17.7 DAYS Duke CE / 19
Technology Hardware and Storage Wireless Telecommunication Semiconductors -124.9 DAYS 152.9 DAYS -14.4 DAYS -46.7 DAYS 166 DAYS 48.6 DAYS -38.9 DAYS 171.3 DAYS 81.5 DAYS INDUSTRY = 77.2 DAYS INDUSTRY = 208.4 DAYS INDUSTRY = 170.7 DAYS Duke CE / 20
Industrial Conglomerates Chemicals 28.9 DAYS 41.5 DAYS 31.1 DAYS 68.1 DAYS 54 DAYS 68.2 DAYS INDUSTRY = 176.4 DAYS INDUSTRY = 227.8 DAYS Duke CE / 21
Global Top 10 Rank Name Country Industry Cycle Time Industry Mean Technology Hardware, 1 US Storage & -125 77 2 ES Air Freight & Logistics -94 59 3 US Pharmaceuticals 9 96 4 FR Aerospace & Defense -77 60 5 FR Construction & Engineering -110 9 6 Cia Brasileira de Distribuicao BR Food & Staples Retailing -29 63 7 GB Pharmaceuticals 14 96 8 US Software -172-75 9 US Chemicals 42 229 10 AT Machinery -59 150 Duke CE / 22
Global Rankings Spreadsheet You can find the full rankings of companies at the following website: http://www.dukece.com/global-productivity-rankings/ You can find an introduction video to ROIC and Financial Cycle Time on YouTube: https://youtu.be/hhjgfzoivvk Duke CE / 23
Duke CE / 24 Questions?
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