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: Andrew Ng, AI guru
“In the age of AI, strategy is no longer just about where to play; it’s about how to adapt.” — Andrew Ng, AI guru
This quote from Andrew Ng captures a profound shift in how organizations and leaders must approach strategy in the era of artificial intelligence. Traditionally, strategic planning has focused on identifying the right markets, customers, or products—the “where to play” aspect. However, as AI rapidly transforms industries, Ng argues that the ability to adapt to ongoing technological changes has become just as crucial, if not more so.
The background for this perspective stems from Ng’s deep involvement in the practical deployment of AI at scale. With advances in machine learning and automation, the competitive landscape is continuously evolving. It is no longer enough to set a single strategic direction; leaders need to develop organizational agility to embrace new technologies and iterate their models, processes, and offerings in response to rapid change. Ng’s message emphasizes that AI is not a static tool, but a disruptive force that requires companies to rethink how they respond to uncertainty and opportunity. This shift from fixed planning to adaptive learning mirrors the very nature of AI systems themselves, which are designed to learn, update, and improve over time.
Ng’s insight also reflects his broader view that AI should be used to automate routine tasks, freeing up human talent to focus on creative, strategic, and adaptive functions. As such, the modern strategic imperative is about continually repositioning and reinventing—not just staking out a position and defending it.
About Andrew Ng
Andrew Ng is one of the world’s most influential figures in artificial intelligence and machine learning. Born in 1976, he is a British-American computer scientist and technology entrepreneur. Ng co-founded Google Brain, where he played a pivotal role in advancing deep learning research, and later served as Chief Scientist at Baidu, leading a large AI group. He is also a prominent educator, co-founding Coursera and creating widely popular online courses that have democratized access to AI knowledge for millions worldwide.
Ng has consistently advocated for practical, human-centered adoption of AI. He introduced the widely referenced idea that “AI is the new electricity,” underscoring its foundational and transformative impact across industries. He has influenced both startups and established enterprises through initiatives such as Landing AI and the AI Fund, which focus on applying AI to real-world problems and fostering AI entrepreneurship.
Andrew Ng is known for his clear communication and balanced perspective on the opportunities and challenges of AI. Recognized globally for his contributions, he has been named among Time magazine’s 100 Most Influential People and continues to shape the trajectory of AI through his research, teaching, and thought leadership. His work encourages businesses and individuals alike to not only adopt AI technologies, but to cultivate the adaptability and critical thinking needed to thrive in an age of constant change.
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