Annual Report 1998

6
Business control and financial goals *
The Group objective is to provide SCA’s shareholders with good growth in value and a high level of dividends.
To meet this objective, SCA has developed calculation methods based on cash flows, by means of which the
earnings capacity and long-term profitability of the business can be evaluated continuously.
The objective is to give SCA’s shareholders a return on investment
that is competitive within the forest products industry.
Up to now, the return on market value of SCA’s shares has been
set at between 13% and 15% per year over an economic cycle.
This objective requires that the Company maintains a stable
and increasing cash flow – high earning capacity – and that it
be financially stable. The level for the capital return requirement
varies, however, depending on the long-term trend of
nominal risk-free interest rates and the Company’s risk profile.
Nominal interest rates have dropped parallel with declining
inflation. As a result, the stock market’s yield requirements
have also been adjusted. To adapt more effectively to varying
levels of nominal interest rates, the goal for a return on the
market value of SCA’s shares is now expressed as the sum of
the long-term risk-free interest rate (at year-end 1998 about
4%) and a risk premium of 6%. The level of risk premium is
adapted to the Company-specific risk, calculated in beta values
(see SCA share data, page 9). If, over an extended period, SCA’s
beta value deviates significantly from the market average (that
is, if it deviates significantly from 1.0), the risk premium
should be changed to a corresponding degree.
During 1999, SCA will introduce an incentive program that
reflects the Group’s ambition to provide a good return on SCA
shares. The program will be fully activated only if the return on
* See page 73 for definitions of key ratios.
SCA’s shares exceeds the trend for comparable companies. (See
Note 28).
Business control
SCA uses a method based on cash flow to control the Group’s
business operations. In accordance with this method, Cash
Value Added (CVA), each business unit is assigned an annual
cash flow requirement based on the present value of strategic
investments, the economic life and the return that each unit
should generate. Comparable requirements are imposed on
new strategic investments in acquisitions of companies and
property, plant and equipment. Under this method, for example,
a specific investment will not be made if it does not
meet the requirements. To achieve value-added growth for the
shareholders, SCA is channeling the expansion of its business
toward areas that are believed to offer the greatest surplus,
Cash Value Added.
In practice this means that SCA is making increased resources
available to the Hygiene Products and Packaging business
areas to enable them to expand and make acquisitions.
Growth in demand for these products in Europe and other
parts of the world is expected to be favorable during the years
ahead.
Key ratios and financial goals
Key ratios are reported excluding nonrecurring items through 1995.
The cash flow measurement is reported from the date of the PWA acquisition (1995).
Average
Result result Goal/Req.
1994 1995 1996 1997 1998 5 yrs 1998 1999
Cash flow
Operating cash flow (SEK billion) 6.6 5.8 6.5 7.0 6.51 Cash flow from current operations
6.4 7.0
(SEK billion) 4.9 4.2 4.9 4.3 4.61 Rates of return
3.2 3.8
Capital employed (%) 10 15 11 12 14 12 132 122 Shareholders’ equity (%) 7 16 10 12 13 12 122 112 Financial measurements 3
Debt/equity ratio (multiple) 0.6 0.8 0.8 0.9 0.8 0.8 0.7 0.7
Market-adjusted debt/equity
ratio (multiple) 0.5 0.8 0.7 0.6 0.7 0.7 – –
Debt payment capacity (%) 32 31 30 33 32 32 35 35
1 Average value pertains to 1995–98.
2 Requirement adjusted to current interest and inflation levels.
3 Net debt includes pension liabilities.