- We often see uncertainty in our clients about whether to focus on RONA or growth. While both are obviously important, which will create the greatest value for their companies and shareholders?
- We introduced the market-cap curve to help answer this question by plotting the well-known valuation equation for combinations of RONA and growth at a constant valuation.
- RONA / growth combinations along the curve preserve the company valuation. Combinations above the curve increase the valuation and combinations below the curve decrease the valuation.
- It is easy to see from the graph that companies with high RONA and low growth will benefit more from growth improvements while companies with low RONA and high growth will benefit more from RONA improvements.
- The market-capitalisation curve provides a useful boundary for capital allocation when business segment performance are plotted against the curve.
- ANY performance improvement of ANY business unit raises the aggregate performance and therefore moves the curve outwards – i.e. increases company value.
We have just published our perspective on the imperative to deliver both returns and growth to create shareholder value. It is backed by years of work at Global Advisors clients and research by our team.
We have formulated the approach as a strategy tool: The Market-Capitalisation (Valuation) Curve that you can apply to your business to deliver value. We have specifically addressed the challenges of the Covid-19 period.
You can read more at the original article https://globaladvisors.biz/RonaGrowth
