A review of the investment processes for a major listed company

The challenge

The CFO of a major listed company wanted to be able to assess the impact that various investment opportunities would have on the value of the firm with greater rigour than offered by traditional net present value (NPV) and internal rate of return (IRR) analysis.

Not only where those measures poorly regarded outside of the finance group, but they seemed largely ineffective: despite only approving opportunities with an IRR above the Group’s hurdle rate, the Return on Capital Employed generated by the business had languished below that hurdle rate for over a decade.

How we responded

Together with a team from finance we reviewed the investment evaluation process, expanding traditional NPV analysis to include values for Return on Capital Employed in each forecast year. Through this lens, investment proposals often included hockey stick ROCE numbers, levels that had not been achieved by the business or any other major peer in the geography for more than a decade.

We worked with the finance team to share our research into the conditions necessary to create high returns on capital and developed an industry/supplier/buyer description for various bandings of return.  This enabled them to more rigorously vet investment proposals and discuss with operational managers their concerns and what could be done to improve the likelihood of generating good returns on investment.

The results

The change to the investment process not only improved the confidence in the process and the quality of investment discussions, but it lead to a broader debate about existing operations and which industries the Group wanted to compete in in the coming years.