Global Advisors | Quantified Strategy Consulting

corporate strategy
Fast Fact: Some of your business segments are destroying value – which?

Fast Fact: Some of your business segments are destroying value – which?

By Stuart Graham

Key insights

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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Strategy Tools: Growth, Profit or Returns?

Strategy Tools: Growth, Profit or Returns?

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.


Key insights

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.

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Global Advisors | Quantified Strategy Consulting