Return on Capital: Are Your Investments Measuring Up?
Our CAPEX study found that companies that have established capital planning and delivery maturity achieve a higher shareholder return and significantly higher return on gross fixed assets (ROGFA).
As your executive management team gears up for your next corporate planning cycle, don’t miss the opportunity to ask some critical questions about your capital strategy. How well does it support the growth of your profit margin and top-line revenue? Are your investments measuring up to the expectations you set when you committed the capital?
For many executives, these questions are hard to answer because they have few metrics in place to understand the effectiveness of their capital strategy, and few levers in place to optimize capital effectiveness. This is an especially ironic state of affairs, as many capital intensive companies spend nearly as much or more on capital investments as they do on R&D – one of the most heavily analyzed investments companies make. Without effective metrics and management practices to optimize capital investments, many companies are conceding a critical competitive advantage.
We are working with many of our clients to reverse this trend by creating strategies to proactively manage and measure CAPEX effectiveness. To explore these issues, we teamed up with CFO Magazine to create a CFO/PRTM CAPEX Scorcard that ranks companies along CAPEX performance dimensions. And we pioneered a benchmark study of CAPEX practices this year that spans capital planning, delivery, and effectiveness.
Our CAPEX studies revealed that companies that have established capital planning and delivery maturity achieve a higher shareholder return and significantly higher return on gross fixed assets (ROGFA). We also found that companies that achieve best-in-class ROGFA metrics earn significantly higher shareholder return than those with average ROGFA scores. These companies also achieve higher revenue growth and lower CAPEX intensiveness (CAPEX/sales).
Our firm recently held a CAPEX Executive Roundtable, where leaders from capital intensive industries discussed the opportunities and challenges surrounding the creation of tighter linkages between capital planning, capital asset management, and business results. One CEO remarked on the increased visibility his executive team needs to make effective tradeoff decisions to protect earnings per share (EPS). "As our capital asset base grows, we need to more carefully allocate spending among our many options: maintaining baseline operations, investing for planned growth, establishing risk-mitigation strategies, and improving productivity and yields with technology investments and experiments. Without an adequate view of our investment portfolio, we run the risk of under-investing in maintenance and productivity enhancements because we are so focused on growth."
To begin building an effective capital management strategy, first focus on achieving stability, predictability, and short-term capital cost improvements. Once stability is secured, your can turn your attention to bringing capital management into alignment with other key elements of your long-range plan. This would likely include the implementation of a portfolio management capability and the addition of capital management measures to your management dashboard. Throughout the process, you should integrate competitor analysis and investor goals to ensure clarity and consistency between internal and external measures of success.
In our experience, successful capital management yields tremendous results:
- Investment cost savings on unnecessary spend
- An effective management forum for investment oversight and decision-making
- Significant strategic decisions early in an investment’s lifecycle
- An ability to effect capital management culture
- Integration of investment planning with project execution
- Dramatically reduced churn in project planning
Capital effectiveness is a frequently overlooked management discipline. That is exactly why it offers leadership teams a noteworthy opportunity to secure significant advantage for corporate shareholders.
Authored by Gordon Stewart and Rachel Berg. Read more about the firm’s Capital Asset Strategy & Management practice.
