Due Diligence
Your due diligence is probably wrongGlobal Advisors: a consulting leader in defining quantified strategy, decreasing uncertainty, improving decisions, achieving measureable results.
Our latest perspective - What's behind under-performing listed companies?
Outperform through the downturn
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Decreased uncertainty, improved decisions
Global Advisors is a leader in defining quantified strategies, decreasing uncertainty, improving decisions and achieving measureable results.
We specialise in providing highly-analytical data-driven recommendations in the face of significant uncertainty.
We utilise advanced predictive analytics to build robust strategies and enable our clients to make calculated decisions.
We support implementation of adaptive capability and capacity.
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Thoughts
Global Advisors’ Thoughts: Outperforming through the downturn AND the cost of ignoring full potential
Press drew attention last year to a slew of JSE-listed companies whose share prices had collapsed over the past few years. Some were previous investor darlings. Analysis pointed to a toxic combination of decreasing earnings growth and increased leverage. While this might be a warning to investors of a company in trouble, what fundamentals drive this combination?
In our analysis, company expansion driven by the need to compensate for poor performance in their core business is a typical driver of exactly this outcome.
This article was written in January 2020 but publication was delayed due to the outbreak of Covid-19. Five months after South Africa’s first case, we update our analysis and show that core-based companies outperformed diverse peers by 29% over the period.
Management should always seek to reach full potential in their core business. Attempts to expand should be to a clearly logical set of adjacencies to which they can apply their capabilities using a repeatable business model.
In the article “Steinhoff, Tongaat, Omnia… Here’s the dead giveaway that you should have avoided these companies, says an asset manager,” (Business Insider SA, Jun 11, 2019) Helena Wasserman lists a number of Johannesburg Stock Exchange (JSE) listed shares that have plummeted in recent years.
In many cases these companies’ corresponding sectors have been declining. However, in most of the sectors there is at least one company that has outperformed the rest. What is it about these outperformers that distinguishes them from the rest?
The outperformers have typically shown strong financial performance – be that Growth, ROE, ROA, RONA or Asset Turnover – and varying degrees of leverage. However, performance against these metrics is by no means consistent – see our analysis.
What is consistent is that the outperformers all show clearly delineated core businesses and ongoing growth towards full potential in these businesses alongside growth into clear adjacencies that protect, enhance and leverage the core. In some cases, the core may have been or is currently being redefined, typically through gradual, step-wise extension along logical adjacencies. Redefinition is particularly important in light of the digital transformation seen in many industries. The outperformers are very seldom diversified across unrelated business segments – although isolated examples such as Bidvest clearly exist in other sectors.
Analysis of the over- and underperformers in the sectors highlighted in the article shows that those following a clear core-based strategy have typically outperformed peers through the initial months of the downturn caused by the Covid-19 outbreak.
Strategy Tools
PODCAST: Effective Transfer Pricing
Our Spotify podcast discusses how to get transfer pricing right.
We discuss effective transfer pricing within organizations, highlighting the prevalent challenges and proposing solutions. The core issue is that poorly implemented internal pricing leads to suboptimal economic decisions, resource allocation problems, and interdepartmental conflict. The hosts advocate for market-based pricing over cost recovery, emphasizing the importance of clear price signals for efficient resource allocation and accurate decision-making. They stress the need for service level agreements, fair cost allocation, and a comprehensive process to manage the political and emotional aspects of internal pricing, ultimately aiming for improved organizational performance and profitability. The podcast includes case studies illustrating successful implementations and the authors’ expertise in this field.
Read more from the original article.
Fast Facts
Fast Fact: Great returns aren’t enough
Key insights
It’s not enough to just have great returns – top-line growth is just as critical.
In fact, S&P 500 investors rewarded high-growth companies more than high-ROIC companies over the past decade.
While the distinction was less clear on the JSE, what is clear is that getting a balance of growth and returns is critical.
Strong and consistent ROIC or RONA performers provide investors with a steady flow of discounted cash flows – without growth effectively a fixed-income instrument.
Improvements in ROIC through margin improvements, efficiencies and working-capital optimisation provide point-in-time uplifts to share price.
Top-line growth presents a compounding mechanism – ROIC (and improvements) are compounded each year leading to on-going increases in share price.
However, without acceptable levels of ROIC, the benefits of compounding will be subdued and share price appreciation will be depressed – and when ROIC is below WACC value will be destroyed.
Maintaining high levels of growth is not as sustainable as maintaining high levels of ROIC – while both typically decline as industries mature, growth is usually more affected.
Getting the right balance between ROIC and growth is critical to optimising shareholder value.
Selected News
Quote: Simon Sinek, Start with Why
“Passion alone can’t cut it. For passion to survive it needs structure. A why without how has little probability of success.” – Simon Sinek, Start with Why: How Great Leaders Inspire Everyone to Take Action
The quote captures a critical insight from Sinek’s widely recognized “Golden Circle” framework, which emphasizes that success in organizations and individuals stems not just from knowing their purpose (“Why”), but also from structuring and operationalizing that purpose through actionable strategies (“How”).
Sinek observes that many are inspired by passion and a compelling purpose, but passion by itself is fleeting without the discipline and practical systems that bring it to life. In his view, the most impactful leaders and organizations are those that take their “Why”—the core reason they exist or the cause that drives them—and develop clear, consistent “How” principles, which are the values, processes, or actions that sustain that purpose over time. Without “How,” even the strongest convictions can fizzle, as there’s no reliable way to translate vision into tangible results.
This insight was shaped by Sinek’s own journey. He experienced firsthand the emptiness that can follow when passion is unmoored from structure. During a period of professional dissatisfaction, Sinek began researching why some leaders and organizations consistently outperformed others—not by relying on charismatic personalities or ambitious goals alone, but by embedding their purpose into the very fabric of everything they did. The realization: passion ignites movement, but it is structure that sustains it for the long term.
About Simon Sinek
Simon Sinek is a British-American author, motivational speaker, and organizational consultant best known for pioneering the importance of “Why”—a concept that has redefined how leaders and organizations approach purpose, vision, and growth. He rose to international prominence following his 2009 TED Talk, “How Great Leaders Inspire Action,” which remains one of the most watched TED Talks.
With several bestselling books, including Start with Why, Leaders Eat Last, and The Infinite Game, Sinek explores how clarity of purpose, authentic communication, and principled leadership forge trust and drive sustained success. His ideas and frameworks, like the Golden Circle, are now staples in leadership development across industries, helping organizations move beyond fleeting passion to build enduring, meaningful impact.
Sinek’s work is a rallying call: to harness passion, leaders must also build the structures and processes—the “How”—that allow purpose to thrive and endure.
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