Cash flow and capital employed: Its relationship and impact on firm value – a Case Study of a firm operating in the technique development industry

Abstract

Introduction: Maximizing the shareholder value is the main purpose for many firms. To be able to do so it is important to work with the firm’s cash flow and return on capital employed. Many firms only focus on generating a good profit and forget or find it complicating to work with the cash flow due to difficult calculations. These problems are often face on lower levels such as for business units. By improving the Return on Capital Employed and Cash Flow already at lower levels it will have a greater impact on the whole firm. It will also be easier for a deeper look to find slacks and which factors the company need to work with. Purpose: The purpose with this study is to make it easier for the financial managers to work with cash flow at lower levels by creating a simpler cash flow model. The study also aims to highlight the relationship between capital employed and cash flow. Method: A case study is performed and the essay uses a quantitative approach with help of a qualitative method for a deeper analysis. Two simpler cash flow models is created and analyzed on each of the three business units. Important variables and how those affect ROCE is investigated from earlier research. The relationship between the Capital Employed and Cash Flow is analyzed. Conclusion: The study shows that both of the models can be used when calculating cash flow for a whole year. When considering monthly basis there is still some improvement that needs to be made. The study provides propositions for further improvements, since the study its self is limited in this area because of lack of information. The created model 1 is recommended over model 2, since it provides a better overall result and would also be easier to adjust when needed. The study shows that there is a relationship between capital employed and cash flow. It also confirms earlier researches regarding which parameters that influence ROCE the most.