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Maintain financial and operational flexibility
Maintaining financial and operational flexibility enables us to flex our business and operational models through the economic cycle. As we have said elsewhere, this enables us to react quickly to both negative changes in the market and opportunities of which we want to take advantage. The more growth we experience and plan for, the more financial and operational flexibility we need. A key element of our strategy is ensuring we have the financial strength to enable growth when appropriate and make our returns sustainable. Having a strong balance sheet is fundamental to our success at all stages in the cycle.
A core element of our financial stability comes from our strategy of ensuring that, averaged across the economic cycle, we always deliver RoI well ahead of our cost of capital. RoI through the cycle is the key measure for any rental company and the best medium-term indicator of the strength of the business. We do this in a variety of ways at different stages of the cycle, all focused on the effective management of invested capital and financial discipline.
The maturity of our stores has a big impact on RoI. This is because as stores mature and get bigger and broaden their fleet range there is natural margin and returns progression. Stores that were greenfield sites only two years ago are now already adding same-store growth. We are always focused on moving new and young stores up the maturity curve as there is scope for higher returns as they do so. This also means that we are now at a very different stage in our evolution relative to the current economic cycle to where we were in the last cycle. We have more stores overall and they are larger than at the peak of the last cycle, so we are much better placed to weather the next downturn when it comes, as we know it will.
We have continued, over recent years, to be consistent in our commitment to both low leverage and a young fleet age and we benefit from the options this strategy has provided. As our fleet replacement expenditure is still moderate, we remain in a phase of the cycle where we anticipate both good earnings growth and significant cash generation. Traditionally, rental companies have only generated cash in a downturn when they reduce capital expenditure and age their fleet. In the upturn, they consume cash as they replace their fleets and then seek to grow. We are in a highly cash generative phase as we continue to grow the business in a cyclical upturn. As a consequence, our leverage would trend naturally towards the lower end of our target range of 1.5 to 2.0 times net debt to EBITDA which provides the Group with significant flexibility and security. Policy changes in the US, including the new corporate tax regime are lengthening our current cycle and therefore we do not need to be towards the lower end of our leverage range at this stage. This gives us even more flexibility to invest in growth, which is what we are doing. We get significant competitive advantage from our younger fleet and our purchasing power. Our strong balance sheet allows us to capitalise on this advantage in both North America and the UK.
From this position of strength in the up-cycle, we can ensure we have sufficient financial resources at the bottom of the cycle to prepare for the next ‘step-change’ in the market and capitalise on growth opportunities in the early stages of the next recovery.