ROCE and Cash Flow Analytics
CHAPTER 5 TAKEAWAYS
- “We need to start making some serious money around here to improve the ROCE because anything we do to improve the balance sheet is ‘one time,’ whereas profits with momentum will continue to grow.”
- EBIT/Rev is a definition of Return on Revenue and a measure of how effective the management of a company is in converting Net Revenues into Earnings before Interest and Taxes.
- Rev/CE is a definition of Capital Turnover and a measure of how well the managers of a company manage the capital employed in the company.
- ROCE is a measurement of value created and important because it compares what the management of a company is capable of delivering (Earnings before Interest and Taxes) to what has been invested in the business (Capital Employed). In practice the situation isn't quite that simple, because, in addition to the absolute value of ROCE a management team can deliver, investors are also concerned with the quality of earnings and risk. Therefore, even if a management team maximizes its ROCE, it may not be rewarded by the market place unless it has also taken actions to deal with some of the other issues that go into evaluating how good the ROCE really is.
- Simply because a company has a good Return on Capital Employed doesn't mean that investors will be looking to own the company's stock. Often high returns are correlated with high risk and, therefore, management must be able to convince investors that not only are the returns ...