Understanding your company’s profitability

99% of companies focus on the Income Statement and pay no attention to the Working Capital they consume…

Using only the Income Statement as a criterion, 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, a fundamental pillar of MERCADONA’s business model is that it operates with very low Working Capital relative to its Sales, which significantly boosts its profitability.

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

If we incorporate the Sales dimension into the formula:
ROC = Operating Profit / Sales × Sales / Working Capital; these are the two axes shown in the video chart.
ROC = 3.6% × 6.7 = 23.8%.

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

MERCADONA’s Working Capital Turnover is 6.7, whereas FREIXENET’s is 0.9 (2020). These are different business models; wineries are highly resource-intensive. As a result, MERCADONA achieves a Return of 23.8%, far higher than FREIXENET’s 9.4%.

💧What is your company’s ROC?

💧What is your business model?

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

💧Do you have your Working Capital under control?

💧Do you review your Working Capital level every month?

💧Do you have a budget for your Income Statement, your Working Capital, and its financing?

💧Does your CFO understand ROC?

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

💧Do you know that a large part of cash flow problems stem from poor Working Capital management?

There are concepts that may be unfamiliar and initially seem complex, but when you see a practical case explained with MERCADONA’s data, their purpose becomes clear. Here, we’ve tried to present the concept of ROC simply to make it easier to understand. That said, it is a highly complex topic, 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 entrepreneurs improve when they have a strong purpose for their company and their employees. Contact us and we can grab a coffee to get to know each other: at EYE OF WHALE, we make the complex simple.