SECTION D – STRATEGIC PERFORMANCE MEASUREMENT
QUESTION 01- CHERRY
Cherry operates a chain of depots in Yorkland, supplying and fitting tyres and other vehicle parts to lorries, buses and agricultural vehicles. Cherry’s objective is to maximise shareholder wealth. Due to a slowdown in the Yorkland economy, Cherry’s recent performance has been weak. An unsuccessful acquisition has also caused cash flow problems and a write-off of goodwill of $24.7m in the year to 30 June 2017.
The board has commissioned a benchmarking exercise to help improve Cherry’s performance. This exercise will involve comparison of a range of financial and other operational performance indicators against Feather, a similar business in Zeeland. Feather has agreed to share some recently available performance data with Cherry as they operate in different countries. The reason Feather was chosen as a benchmark is that as well as supplying and fitting tyres and parts to heavy vehicles, a large part of Feather’s business involves supplying electricity to charging points to recharge electric cars. Feather installs and operates the charging points in public places, and users pay Feather for the electricity they use. The board of Cherry intends to follow a similar business model as the use of electric cars is increasing in Yorkland.
The Zeeland economy is growing strongly. Electric car use there has increased rapidly in the last two years, encouraged by tax incentives for businesses, like Feather, to install and operate charging points. The Zeeland government has also underwritten loans taken out by businesses to finance this technology, which has enabled Feather to borrow funds for the significant capital investment required. The cost of components used in the charging points is falling rapidly. Capitalisation of development costs related to this technology is permitted in Zeeland, but not in Yorkland. In 2015, Feather invested heavily in IT systems which significantly improved performance by increasing the availability of parts in its depots, and reducing inventories.
ROCE and EBITDA
Cherry uses return on average capital employed (ROCE) as its main financial performance indicator, and this is to be benchmarked against Feather. One board member suggested that, though it may have some disadvantages, EBITDA (earnings before interest, tax, depreciation and amortisation) could have advantages as a performance measure over the existing measure, and should also be included in the benchmarking exercise.
You have been given the most recently available financial data for both businesses in Appendix 1, with the data for Feather being converted into $ from its home currency.
a. Evaluate the relative financial performance of Cherry against Feather using the two financial performance measures identified in the benchmarking exercise and evaluate their use as performance measures in this situation.