• Strategy
  • CFO Europe Magazine

Go with the Flow

A new scorecard highlights Europe's top companies when it comes to generating cash.

Read the complete results of the 2007 Cash Masters survey, or review just those results that appeared in print.

Life often imitates art. Given the recent twists and turns at his company, Lothar Lanz, for example, can easily relate to the soap operas broadcast on television channels owned by ProSiebenSat.1, the German media group where he is CFO.

A string of impressive results drove the company’s share price from around €5 in early 2003 to €30 this summer. The shares have since fallen nearly 20% though, after the company’s controlling shareholders, private equity firms KKR and Permira, engineered the €3.3 billion takeover of Luxembourg-based SBS in June. The debt-financed deal will transform Munich-based ProSiebenSat.1, boosting revenue by 50% and dramatically altering its capital structure. For this reason, Lanz explains, “cash flow was important before, but not as much as it is now.”

Cashing In

“Cash is king” is a popular, often overused, refrain among CFOs, but some take the mantra more seriously than others. To gauge which companies are most adept at generating and managing cash, REL, a research and consulting firm, ranked the 1,000 largest listed companies with headquarters in Europe by their “cash conversion efficiency” (CCE), measured as cash flow from operations divided by sales. Combing through these companies’ most recent annual financial statements, the inaugural REL/CFO Europe Cash Masters Scorecard also highlights the metrics underlying CCE, including gross margins, SG&A costs and net working capital, among others. (See the rankings that appeared in print.)

At first glance, 2006 was a great year for business. Sales and profits at large European companies grew by double-digit percentages, while working capital and SG&A costs fell in relation to revenues. However, companies “weren’t able to fully reap the rewards that could be expected,” according to Stephen Payne, president of REL. That’s because CCE declined for the second year in a row, resulting in “fewer euros, relatively speaking, completing the journey through a company’s cost structure and onto the balance sheet,” says Payne. In 2006, average CCE fell to 11.7%, from 12.4% in 2005. (See “Flow of Funds” at the end of this article.)

Less than half of the 1,000 companies in the sample improved CCE last year, with only a third posting improvements in both 2005 and 2006. If laggards improved their CCE in line with the top quartile of their sectors, REL reckons some €400 billion in additional cash flow could be generated, increasing the scope for capital spending, dealmaking, share buybacks and debt repayment.

It’s always easier to improve “efficiency and effectiveness” when times are good, notes Payne, though complacency is difficult to overcome, as the recent deterioration in CCE shows. More often than not, as with ProSiebenSat.1, it takes an external shock to move cash management up the corporate agenda.


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