Why return on capital could be the metric that best helps companies achieve higher returns.
Vincent Ryan, CFO Magazine
June 1, 2008
A company should pursue projects/initiatives that have a positive NPV (an IRR that exceeds its cost of capital). However, this alone is insufficient in that the market value of an entity includes multiple variables including growth, ability to execute growth, global capabilities, management depth and quality, etc. At lower levels in an organization where levels of financial acumen and sophistication are less, then ROC may be acceptable. At a CFO level and with a Wall Street perspective, cash flow generated from operations, effective management of NAE, clearly communicating the company growth agenda, and establishing processes with effective management tools to manage variability is a more compelling message than ROC.
Posted by Joseph Krolczyk | June 30, 2008 07:42 am
rho of 91.5% shouldn't be accepted at face value, where is the methodology? it is unrealistic to assume a single factor can have such an overwhelming impact on a market value... ...and IMO, a periodical called "CFO" should trouble us with the particulars of the definition. what is new here vis a vis stern stewart's eva, mckinsey's ROIC, etc etc.
Posted by David Harper | June 03, 2008 06:00 pm© CFO Publishing Corporation 2009. All rights reserved.