“The goal is not to have the longest train, but to arrive at the station first using the least fuel.”
Tom Murphy, Former Chair and CEO of Capital Cities / ABC
My starting point for evaluating business decisions, and making investments is Return on Tangible Capital (ROTC).
It is a measure of the cash generated by the business relative to the tangible assets deployed in generating that cash.
EBITA * (1 – tax rate) / (net working capital + PPE)
It’s essentially applying bond math to businesses, investing and management.
In other words, if a businessperson paid to build or own those tangible assets, what would be the yield on their money.
In general, bigger numbers (yields) are better when it comes to creating shareholder value.
But, to generate a big number (or excess return), the company requires some form of advantage.
Without a sustainable competitive advantage (or moat), other businesses will copy what you are doing; they will enter your business; and, they will drive down your returns.
Executives and investors would benefit from asking themselves what they (or their company) is doing to protect or enhance those returns.
If you are interested in engaging further in this conversation, I’d love to go on the journey with you. Please subscribe to my free newsletter/blog. Also, please follow me on Twitter, connect with me on LinkedIn, and post a comment below. I’d love to know what you think.
Greetings! Very useful advice in this particular article! It is the little changes that produce the greatest changes. Thanks a lot for sharing!