Mercedes-Benz Group: Capitalizing on Premium and Electric Vehicles for ROCE Growth

Mercedes-Benz Group (ETR:MBG) has been on a roll, with its Return on Capital Employed (ROCE) climbing 169% over the last five years. This impressive growth can be attributed to the company's strategic focus on premium and electric vehicles, as well as its effective reinvestment of profits into capital projects. Let's delve into the factors driving Mercedes-Benz Group's ROCE growth and explore how the company's approach to working capital management has contributed to its success.

Premium and Electric Vehicles: A Winning Combination

Mercedes-Benz Group's focus on premium vehicles has allowed it to maintain a high average sales price, with the average sales price increasing by 2% to €74,200 in 2023. This has led to improved net pricing and higher profitability. Additionally, the company's investment in research and development, particularly for future platforms and technologies such as MB.OS, has enabled it to stay ahead of the competition and maintain its market share in key regions. The company's success in scaling electric vehicles, with battery electric vehicles now accounting for 12% of overall Mercedes-Benz Cars sales, has further boosted its profitability.

Reinvesting Profits for Capital Projects

Mercedes-Benz Group's strategy of reinvesting profits into capital projects has been instrumental in driving its ROCE growth. The company has consistently invested in property, plant & equipment (PPE) and research & development (R&D), with investments in PPE totaling €3.7 billion in 2023, up from €3.5 billion in 2022. R&D expenditure amounted to €10.0 billion in 2023, compared to €8.5 billion in 2022. These investments have allowed the company to develop new cutting-edge electric and digital innovations, scale electric vehicles, and deliver solid financial results.

Working Capital Management: A Key Factor in ROCE Growth

Mercedes-Benz Group's approach to managing working capital has significantly contributed to its ROCE growth. In 2023, the company achieved a high cash conversion rate and lower working capital, leading to a substantial increase in the Free Cash Flow of the Industrial Business to €11.3 billion, up from €8.1 billion in 2022. This improvement in cash flow is a result of the company's effective management of working capital, which has helped to drive its ROCE growth. By maintaining a high cash conversion rate and reducing working capital, the company has been able to generate more cash from its operations, which can then be reinvested into the business to drive further growth.

In conclusion, Mercedes-Benz Group's ROCE growth can be attributed to its strategic focus on premium and electric vehicles, reinvestment of profits into capital projects, and effective working capital management. As the company continues to execute its strategy and adapt to the evolving automotive landscape, investors can expect Mercedes-Benz Group to maintain its strong financial performance and continue to generate attractive returns on capital.