Intangibles

By Ramesh Akkineni
From an article in Financial Express

Why is it that many FMCG companies have a very high return on capital employed?

For FMCG companies, business is based primarily on intangibles; the main assets of an FMCG company are its brands and its people. Typically, a large part of the value addition comes through branding and distribution. If the company itself creates a brand, it does not appear on its books. For brands that are acquired too, FMCG companies usually follow the practice of writing the intangible off the books quickly. Inputs towards brand building are written off as revenue expenditure.

Many FMCG companies depend on third party manufacture of products, especially where the process is simple.

Both these factors help in keeping the capital employed lean and therefore for a given level of returns, the ROCE is quite impressive.

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