Financial and Capital Strategy: Advancing Management Conscious of Cost of Capital and Share Price
Toshiharu Kamijo
Managing Executive Officer in charge of corporate coordination and financial strategies
In April 2025, SWCC made a fresh start with a new management structure. We are now at a point where we are shifting our focus from structural reforms to growth under our ongoing Change & Growth SWCC 2026 Medium-term Management Plan and its rolling plan.
SWCC has been conducting Return on Invested Capital (ROIC) management since FY2019. We have reviewed not only operating profit and other items listed in the statement of income but also our business portfolio based on the invested capital and its cost. The review of unprofitable or inefficient businesses has been completed. We are in the phase of further advancing our financial and capital strategies in line with the growth strategy.
01 Towards a new phase of ROIC management
ROIC management was a pillar of the structural reforms. ROIC increased from 5.6% before its introduction to 8.3% in FY2023 and to an estimated 8.7% in FY2024. The figure has risen so considerably that we may reach the 10% mark. In addition to the reform of unprofitable business, we have continued an initiative extending the ROIC tree to the working level and improving it across the company with a view toward increasing the earning power of businesses as a whole.
In the future, we will be in a phase of increasing invested capital, which is in the denominator of the formula for ROIC, as a result of investments for growth. In growing businesses, ROIC may decrease in the short term because of investments, but we need to unhesitatingly invest to create future cash flows. In our ROIC management in the future, we will not simply focus on ROIC. Using a combination of ROE, EBITDA growth rate and other indicators, we will implement financial and capital strategies with a view toward increasing corporate value over the medium and long term.
The essence of ROIC management is in the widening of the spread between ROIC and the weighted average cost of capital (WACC), which is the cost of procuring funds, to increase corporate value. The beta value used in calculating the cost of shareholders' equity has been on a downward trend in the last few years. We will be working to achieve stable revenue, to improve risk management, governance and sustainability, to enrich our dialog with shareholders and make other efforts to further reduce this figure.
On the other hand, the increase of the risk free rate and the increase of equity capital due to the accumulation of profit will be factors that increase the cost of shareholders' equity. We will use interest-bearing debt to invest in growth and control equity capital through shareholder return to keep WACC at an appropriate level and to secure a ROIC-WACC spread that is the source of corporate value.
SWCC's ROE Trend
SWCC's ROIC Trend
02 Future profit comes from the balance sheet
In pursuing ROIC management, it is important to transition to management that pays attention not only to the statement of income but also to the balance sheet. SWCC will continually review its balance sheet based on the idea that future profit comes from the balance sheet.
In FY2024, we disposed of cross-shareholdings, land and other non-business assets and used the cash generated from the disposal of assets to acquire TOTOKU INC. With an EBITDA margin of approximately 20%, TOTOKU has the ability to produce cash. We have a policy of continuing efforts to increase asset efficiency and to invest in growing businesses in a bid to expand future free cash flows. In addition, we worked persistently to shorten the term for recovering trade receivables and to reduce inventories, and that helped contract our working capital. We will continue to endeavor positively to improve the cash conversion cycle (CCC).
Traditionally, we valued operating profit and other items on the statement of income. Today, we are paying attention to the balance sheet and making companywide efforts to make management that is continually conscious of cash flows ubiquitous.
Balance Sheet Management
03 Advancement of management that is conscious of the cost of capital and the stock price
Our past structural reform initiatives have drastically improve the financial standing of the SWCC Group. A management structure with high capital efficiency and the ability to earn stable revenue is being constructed.
Going forward, we will implement management that is conscious of cash flow in order to secure funds for cash allocation while unfailingly increasing EBITDA. In addition to investments for growth, in human capital and in research and development, we will address shareholder return more actively than ever before.
From the perspective of increasing shareholder value, we aim to have total shareholder return (TSR) consistently outperform the TOPIX, inclusive of dividends.
Approach to Financial KPIs
To increase the TSR, we will review our business portfolio to invest capital in areas with high growth potential and implement digital transformation (DX) to continually improve productivity. Through these efforts, we will continuously increase our corporate value. Regarding shareholder return, we will pursue a policy of maintaining a payout ratio of 35% or more an ROE of 4%, even if profits decline. We will work to increase the stock price and shareholder return to live up to the expectations of our shareholders.
