Assessing Corporate Performance
Measuring Return on Invested Capital
HOLT helps investors quickly assess which category a company belongs by measuring a firm’s return on investment, orCFROI® level, and then charting it clearly against the firm’s cost of capital. The resulting spread is positive, negative or neutral.
Comparing Returns with Cost of Capital
Returns that exceed their cost of capital create value.
Companies should strive to invest in assets at high returns as fast as possible. This intuitively makes sense if you think about borrowing money at 6% and then turning around and earning 15% on an investment. The HOLT platform shows that in 2009 there were almost 2,000 companies around the world that earned returns higher than 15%. Some names that are on this prestigious list include Apple, Coca-Cola, Danone, L’Oreal and Unilever.
Returns below the cost of capital destroy value.
Companies in this position should focus on increasing returns rather than on asset growth. While it is doubtful that a person would borrow at 6% for an investment earning 3% per year. Surprisingly, this happens at an alarming rate in the corporate world. In 2009 there were almost 5,000 firms that fell into this dubious category.
Returns equal to the cost of capital have no impact on shareholder value.
Simply put, borrowing money and investing it the same return creates no benefit.