Trésorier/Treasurer magazine - N°99 - Nov/Dec/Jan 2018 - 10

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LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE

N°99

- NOV /

DEC / JAN 2018

VALUE
GENERATION

How to create (more) value for
the company with a better capital allocation?
Effective capital allocation is at the heart of value generation. A company should raise capital
from the market, deploy capital and distribute it to stakeholders. However, it is one of the
hardest organizational disciplines to monitor and to master. A clear and well-defined risk
appetite and tolerance of the company will also drive the optimum allocation of capital. We have
seen deleveraging over last years and overabundance of liquidities while interest rates became
negative in the EUR zone. A proper capital allocation remains a complex alchemy.

Capital allocation
- What does it mean?
It is the process of dividing optimally
financial resources among several business lines. The goal of a good capital
allocation would be to maximize output
per EUR spent. A company's decision
on where to best place resources to
produce maximum possible return for
the shareholders. Capital allocation decisions represent attempts to produce
profit in the most efficient way possible.
This can be quite difficult to achieve,
as the options for capital allocation are
virtually limitless. Capital allocation
decisions may involve making more of
the same product, investing in research
to invent new products, paying out more
in dividends or making any number of
different decisions and investments.
The key issues are: (1) will this business

be worth more in the future? (2) What
could management do to maximize
returns on investment? Number of
companies don't know how to allocate
capital effectively. The ultimate goal is
to create long term value per share. The
companies should focus on building
longer term value, reflected by stock
valuations. It is essential when companies pile cash, have modest growth
and when return on invested capital
expectations are high. It is important
to allocate assets with a rigorous implementation of an investment strategy
that attempts to balance risk versus
reward by adjusting the percentage
of each asset in a portfolio according
to investor's risk tolerance, goals and
investment time frame. It is a complex
alchemy to portion and balance investments, asset classes and capital use

in order to maximize return given level
of risk. Financial assets vary in returns
from each other depending on market
conditions. Asset classes are not
perfectly correlated with each other.
However, diversification across multiple
sectors tends to bring down the overall
risk of a portfolio of assets.

Deleveraging and cash piling
The crisis and the lending landscape
changes have pushed corporates to
reduce their leveraging over last years.
They have been in general cautious and
have ensure sufficient liquidities. The
breadth and level of possible tailored
Credit spreads are historically low, as
well as interest rates, balance-sheets
have been restructured and cash
balances are at record highs.

Table des matières de la publication Trésorier/Treasurer magazine - N°99 - Nov/Dec/Jan 2018