19 Aug 2013
‘Return on capital employed’ (ROCE ) is a crucial part of how investors quantify company performance, yet it is tricky for them to assess.
P wC’s research in the investment community has pinpointed some of the difficulties, and suggested some improvements to disclosures that could help investors and benefit companies too.
The research finds that ROCE can be challenging to calculate when assets are restated to reflect their fair value. For example, the returns generated from a real estate investment can be obscured if the asset is marked to the current market value. Investors would appreciate disclosure of the historical cost of capital expenditure, to give them a more relevant number to work with.
Acquiring another business can be the largest discretionary use of capital by management, so investors say it is a key focus for them. And yet we are told that all too often, the disclosures that accompany an acquisition fall short of investor needs. Even basic data, such as the total cost of the acquisition can be hard to find. Current accounting standards do not require management to provide information on the debt acquired, or liabilities assumed, like pensions.
Investors often struggle to calculate whether an acquisition has generated adequate returns over time. As assets may have been acquired for strategic purposes, the financial performance of the investment can be hard to isolate from broader corporate performance measures.
“Consistency is key with disclosures,” reports PwC director Alison Thomas. “It’s crucial that companies are trans- parent about how they measure ROCE and if definitions change, prior years should be restated for comparison. To really differentiate reporting for investors: reconcile ROCE measures to GA AP and share your capital employed by segment.”