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The CFO-PRTM Capital-Spending Scorecard
Companies with the biggest and the smallest returns on capital investment.
CFO Staff, CFO Magazine




Measuring Capex

To find out how the 300 companies in its sample fared in terms of return on capital spending, Pittiglio Rabin Todd & McGrath (PRTM) ranked the 20 largest companies (by sales) in each of 15 industries according to their 2003 earnings before interest, taxes, depreciation, and amortization (EBITDA) divided by the book value of their fixed assets. (Data was provided by Thomson Financial and the individual companies.) The resulting ratio — return on gross fixed assets (ROGFA) — reflects how much a company earns on its property, plant, and equipment. But since that number can be boosted by a decline in asset value, the Waltham, Massachusetts-based consulting firm's scorecard also shows how much those companies spent in 2003 and how that amount has changed since 2000. To complete the picture, the analysis also shows a company's degree of capital intensiveness (capital expenditures divided by revenue) and its revenue growth and shareholder returns.

Granted, ROGFA may not be the most appropriate measure to determine whether to, say, build a new plant or outsource manufacturing. For that type of decision, a metric that takes into account a company's cost of capital is generally more appropriate. But such measures provide too broad a perspective for assessing capex productivity. For one thing, they assume that assets fully depreciated for tax and accounting purposes have no value, when in fact most companies spend money to maintain tangible assets even after they have been fully written off. They also include working capital. As a result, ROGFA can be more useful in helping companies understand how efficiently they are deploying capital on those assets. ROGFA is most useful, says PRTM director Amram Shapiro, "in assessing the overall productivity of a company's capex investment." —Ron Fink

To learn more about ROGFA, see individual analyses of the 15 industries in the scoreboard, and read related articles on the subject of capex management, please visit www.prtm.com/capex.

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