The measure used by the Group to assess satisfactory returns is total shareholder return (TSR) over time. We measure our performance by comparing Wesfarmers’ TSR against that achieved by the broader Australian market Index.
Growth in TSR relies on improving returns from invested capital relative to the cost of that capital and growing the capital base at a satisfactory rate of return on capital (ROC)1.
Given a key factor in determining TSR performance is movement in Wesfarmers’ share price, which can be affected by factors outside the control of the company (including market sentiment, business cycles, interest rates and exchange rates), the Group focuses on return on equity (ROE) as a key internal performance indicator.
While ROE is recognised as a fundamental measure of financial performance at a Group level, ROC has been adopted as the principal measure of business unit performance. ROC focuses divisional businesses on increasing earnings and/or increasing capital productivity by managing factors they can control, as well as making an adequate return on any new capital deployed.
Minimum ROC targets for each division are set based on their pre-tax cost of capital, while satisfactory ROC targets are established based on the Group’s ROE targets, which are reviewed annually with reference to the performance of the broader market.
1ROC = EBIT/(Working capital, fixed assets and investments less provisions and other liabilities).
We believe that in order to deliver satisfactory shareholder returns it is important to try to achieve a cost of capital advantage, which is best done through a strong focus on cash realisation, the maintenance of a strong balance sheet and having flexibility in financing options.
Working capital and capital expenditure
The Group continuously looks to improve the working capital efficiency of all of our businesses, and also ensures strong discipline in relation to capital expenditure or any other investment decisions that are made.
Shareholder distributions and portfolio management
The Group endeavours to optimise shareholder returns through our dividend policy, our approach to capital management and disciplined portfolio management.
When reviewing the acquisition of businesses the Group applies various filters, as illustrated below. Importantly, in applying these filters the Group applies a long-term horizon to investment decisions and remains very disciplined in our approach to evaluation, with the most important filter being whether the investment is going to create value for shareholders over time.