99% of companies focus on the Profit and Loss Account and pay no attention whatsoever to the Operating Capital they consume…

Based solely on the Profit and Loss Account, we might conclude that MERCADONA has very low profitability, with an operating margin of 3.6% on sales, far below FREIXENET’s 11.0%…

However, one of the fundamental pillars of MERCADONA’s business model is that it operates with very little Operating Capital in relation to its sales, which significantly multiplies its profitability.

Data for MERCADONA S.A. for 2021: Sales of €25,154,320 thousand, Operating Profit of €900,425 thousand and Operating Capital of €3,779,889 thousand.
Its Return on Capital (“ROC”) = Operating Profit / Operating Capital = 23.8%.

If we include the sales dimension in the formula:
ROC = Operating Profit / Sales × Sales / Operating Capital; these are the two axes of the chart in the video.
ROC = 3.6% × 6.7 = 23.8%.

MERCADONA’s Operating Capital Turnover (Sales / Operating Capital) is 6.7, which significantly increases its profitability and reflects the company’s high level of real profitability.

MERCADONA’s Operating Capital Turnover is 6.7, whereas FREIXENET’s is 0.9 (2020). They are different business models; wineries are highly resource-intensive. As a result, MERCADONA achieves profitability of 23.8%, far above FREIXENET’s 9.4%.

💧What is your company’s ROC?

💧What is your business model?

💧Where do you stand on the ROC chart compared with your competitors?

💧Do you have your Operating Capital under control?

💧Do you review your Operating Capital level every month?

💧Do you have a budget for your Profit and Loss Account, your Operating Capital and its financing?

💧Does your Finance Director understand ROC?

💧Does your Balance Sheet reflect the physical reality of your company?

💧Did you know that a large part of cash-flow problems come from poor Operating Capital management?

There are concepts that may not be widely known and that, at first, may appear complex. But when you look at a practical case explained using MERCADONA’s data, their meaning becomes clear. Here, we have tried to present the concept of ROC in a simple way to make it easier to understand. That said, it is a topic with a high level of complexity, especially because it requires access to quality data once the formula is understood.

We are experts in Business Management and Value Creation, and we help business owners improve when they have a genuine commitment to their company and their people. Contact us and we can have a coffee to get to know each other: at EYE OF WHALE, we make the complicated simple.