There are only two business reasons to own or invest in a company. One is because the company will grow its earnings and therefore value. The other is to receive dividends from the cash flow. In practice, it is often a combination of both.
Management teams perform better if they are measured against some set of criteria. One of the criteria that is of interest to investors is the return provided by funds invested in the business. A measurement of this is Return on Capital Employed (ROCE).
In a general sense, managers are tasked with two key objectives: (1) Find attractive investments, and (2) deliver attractive returns. Since ROCE compares what management delivers (Net Operating Profit after Tax) to what has been invested in the company (Capital Employed), it is a good measure of management's effectiveness.
In some instances, a decline in cash flow can be avoided by cutting costs. In fact, management can increase cash flow by disinvesting in the business. However, in today's business climate, increasing cash flow by expense control doesn't work for very long. Eventually cost cutting is a dead end and the only remaining road to increasing shareholder value is growth. Growth opportunities don't just come along. A company has to be committed to investing for growth in order to get it and even then success is highly uncertain. Unlike sustaining investments, investments focused on growth inherently involve more risk. The upside is, of ...
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