Our latest perspective - What's behind under-performing listed companies?
Outperforming through the downturn
Breaking Covid-19 / Corona-virus pandemic news, how to lead
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.
By Stuart Graham and Marc Wilson
Stuart is a manager and Marc is a partner at Global Advisors.
Both are based in Johannesburg, South Africa.
Growth, profit or returns? It’s all three, however we find that the relationship between these and shareholder value creation is poorly understood – if at all.
All three measures become critical to the way forward as companies navigate the Covid-19 crisis.
After ensuring business survival, navigating through the Covid-19 crisis requires returns on invested capital AND growth to deliver shareholder returns. S&P 500 companies averaged 13% RONA and 5% revenue growth (CAGR) through the financial crisis (2008-2012) .
Monolithic survival approaches may starve compensating growth opportunities – a portfolio approach is required.
Returns are not enough – companies must also grow to create value.
Profits and cash flows cannot increase indefinitely through cost-reduction, efficiency, business mix, etc – top-line growth is critical.
Returns must be above costs of capital to be value accretive.
S&P 500 companies averaged 13% ROIC and 5% revenue growth (CAGR) through the financial crisis (2008-2012).
Margins and revenue growth, or even profit growth in themselves don’t answer that question of whether shareholder value was created or destroyed. There are many examples of where growth and high margins actually destroy value.
Company valuations reflect an aggregate of their business portfolio – rebalancing segments based on their growth and return profiles can lift company value.
Growth requires investment – at the very least in the working capital required to support revenue growth.
Measuring RONA or ROIC and Revenue growth shows whether business activity is value accretive or destructive.
You can use the Global Advisors Market Cap (valuation) framework to map your business – and agree action to deliver improved shareholder returns.
By Stuart Graham
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.
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Our results closely match the results detailed in Tasha Eurich’s book, “Insight,” where 95% of people rate themselves self-aware but just 10 to 15% are.
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Now read So You Think You’re Self Aware?
Global Advisors is different
We help clients to measurably improve strategic decision-making and the results they achieve through defining clearly prioritised choices, reducing uncertainty, winning hearts and minds and partnering to deliver.
Our difference is embodied in our team. Our values define us.
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Define optimal business portfolios aligned with investor expectations
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Consultants join our firm based on a fit with our values, culture and vision. They believe in and are excited by our differentiated approach. They realise that working on our clients’ most important projects is a privilege. While the problems we solve are strategic to clients, consultants recognise that solutions primarily require hard work – rigorous and thorough analysis, partnering with client team members to overcome political and emotional obstacles, and a large investment in knowledge development and self-growth.
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