Meritor Finance: ReTurn On Invested Capital

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PART ONE

Project Overview

Project Instruction

Meritor is a leading global supplier of drivetrain, mobility, and braking and aftermarket solutions for commercial vehicle and industrial markets. The company serves commercial truck, trailer, defense, and specialty and aftermarket customers around the world.

Meritor Finance calculates ROIC (Return on Invested Capital) at business unit level on a quarterly basis. However, this metric is not applied to any specific business unit decision making process on a consistent basis. Meritor would like to explore how this metric can be better utilized to analyze various aspects of the business (business performance, capital projects, business gained/lost, etc.)

Deliverables

1. Report on ROIC usage by other companies in similar industries and findings on the use of ROIC in other industries.
2. Detailed recommendation on how Meritor should utilize the ROIC metric.
3. Peer comparison of ROIC using recommended reporting methods.
4. Recommended work instructions for the ROIC metric maintenance.

Methodology

To approach the topic, our team has conducted thorough research through the following methods:

1. Secondary research - online articles, books, library
2. Company benchmark - interview with industry experts
3. Market indicators - Bloomberg, 10K reports
4. Professors - academic insight

PART TWO

ROIC usage in other companies

Overview

For our research, we interviewed six finance leaders in three major comparable companies: Ford Motor Company, Caterpillar Inc., and Deere & Company (John Deere). Among the interviewed professionals were a Business Strategy Director, a Director of Internal Controls, a Financial Analysis Manager, and a former Corporate Finance Director.

The metrics they use are OROA (Operating Return on Assets), OPACC (Operating Profit after Capital Charges), NPV and SVA (Shareholder Value Added). None of these companies specifically use ROIC, albeit utilizing some similar metrics. Additionally, each company has its unique approach - none of them uses the same metrics as the other.

Metrics Description

We provide a brief description for each of the metrics reported and additional charts showing Meritor and peer’s performance under those metrics. By the end of this section we also included a ROIC benchmark with selected peers and industries.

All the data used in this section is market data collected from Bloomberg’s terminals.

One of the companies uses OROA, which they define as NOPAT divided by Total Assets minus Cash. The interesting twist here is that they consider OROA to be a “passive” metric, in that there is not a straightforward way to change it - it is more a consequence of other actions. In order to make OROA useful, this company breaks it down and focuses on OROS (Operating Return on Sales) and on Assets Turns. Since the product of OROS and Asset Turnover results in OROA, they focus on either improving profitability of their sales or on increasing their asset turnover in order to drive a higher OROA.

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