Disclaimer 1: I don’t know much about corporate finance.
Disclaimer 2: The company is not held by a PE group, but by an investor looking to keep it for an indefinte period of time.
Suppose you had one company in your portfolio, and your overall goal was to increase FCF over the next 3-5 years to invest in other (unrelated) companies;
• How would you go about setting reasonable goals for the company in question?
• Which financial metrics would you use in setting your goals?
• How would you set the goals to avoid that the goal be met by destroying value?
My take on it is this:
• I would set a goal in terms of FCF/IC, starting from industry averages, correcting them by assuming low/no reinvestment (i.e. I would take FCF and add back say 80% of capital expenditures)
• In order to avoid destruction of value, I would require no negative impact on NOPLAT and ROIC, assuming no changes in WACC
Please feel free to tell me how wrong I am!
