In March 2023, the Tokyo Stock Exchange requested listed companies (Prime Market / Standard Market) to address and disclose their management practices concerning capital costs and stock prices.
Since fiscal year 2019, our company has implemented ROIC management, reassessing our business portfolio not only based on income statement items such as operating profit but also considering invested capital and its cost. Consequently, we disclosed the status of these measures on May 12, 2023.
Subsequently, from the perspective of improving capital efficiency, we partially sold our cross-shareholdings in September 2023. Utilizing the proceeds from this sale, we repurchased approximately 1-billion-yen worth of our own shares in November. Due to our strong business performance and these capital policies, our Price-to-Book Ratio (PBR) has improved and has consistently remained above 1.
We are in the process of moving into a growth phase, and our financial and capital strategies will be further upgraded to keep pace with our growth strategy.
01 Further Refinement in ROIC Management
Since the introduction of ROIC management in fiscal year 2019, we have achieved significant results, with the average ROIC improving from 3.8% before implementation to 7.1% over the four years following its introduction. In the early stages of implementation, we identified and enhanced businesses with low returns on invested capital, even if they were not operating at a loss, thereby achieving improvements in ROIC.
Going forward, in addition to reforming unprofitable businesses, we will thoroughly implement the ROIC tree at the operational level to enhance the overall earning power of all our businesses.
The essence of ROIC management lies in increasing ROIC and expanding the spread with WACC, the cost of capital, thereby enhancing corporate value.
While we continue our efforts to increase ROIC, it is also essential to keep an eye on the level of WACC. The beta value used in calculating the cost of equity has been on a downward trend in recent years. We will work towards further reduction through stable profit generation, strengthening risk management, governance, and sustainability, and enhancing dialogue with shareholders.
In addition, due to stable performance in recent years, our equity accumulation has progressed, resulting in a D/E ratio below 50%. From the perspective of controlling WACC, it is also necessary to apply a certain level of leverage through debt financing. Therefore, we will consider financing options to support growth investments in line with the execution of our growth strategy.
The Evolution of Our ROIC
02 Future Profits Are Generated from the Balance Sheet
As we advance ROIC management, it becomes important to shift our focus to management that considers not only the P&L but also the balance sheet. Based on the belief that 'future profits are generated from the balance sheet,' we will continuously review and optimize our balance sheet.
Specifically, we aim to improve capital efficiency through actions such as selling policy-held shares and idle real estate. The cash generated from streamlining our balance sheet will be allocated to growth investments and strategic initiatives, contributing to the enhancement of business earnings.
Furthermore, by rigorously focusing on shortening the collection cycle of accounts receivable and reducing inventory, we have achieved results in compressing working capital. We will continue to actively pursue improvements in the Cash Conversion Cycle.
Balance Sheet Management
03 Cash Allocation in the Growth Phase
Through the structural reforms we have undertaken so far, the financial position of our group has significantly improved, and we have established a framework capable of consistently generating stable earnings.
Moving forward, we will focus on cash flow-oriented management to ensure the allocation of funds from EBITDA increases, securing the source for cash allocation.
Currently, demand for our core business in the electricity sector remains robust, with increasing strategic investment needs. Furthermore, in our automotive business segment, we anticipate growth investments in peripheral areas surrounding our existing operations. Therefore, we plan to actively allocate cash to meet these demands. For large-scale growth investments such as M&A, we will also consider various financing methods as part of our procurement strategy.
At the same time, in addition to growth investments, we will also proactively respond to shareholder returns more aggressively than before.
From the perspective of enhancing shareholder value, we aim to consistently exceed the market (including dividends in TOPIX) in TSR (Total Shareholder Return) by increasing the dividend payout ratio, alongside stock price appreciation.
We aim to reach a dividend payout ratio of 35% as soon as possible, achieving stable dividends from earnings. We will also consider maintaining stable dividends based on the current accumulation of capital, even in the event of lower-than-expected earnings.
During the growth phase, we will implement flexible cash allocation according to the situation, balancing growth investments with shareholder returns.
