We are delighted to present the ninth Armillary Private Capital Return on Capital Employed (‘ROCE’) report. This year the total number of entities in our data set of NZX, NZAX, USX, and selected Crown entities is 144. We have also included a sample of 259 private companies, although we have not identified those entities individually.
The ROCE methodology we use in this report was developed by Du Pont Corporation and is therefore not proprietary to us, although we are proponents. As it is simple to apply, anyone who understands the methodology can use it. We regularly use this methodology as a tool in our client engagements and in our financial training curriculum.
A benefit of the ROCE methodology is that the performance of an entity can be broken down into its components of profitability and activity, for
deeper analysis. Profitability, as measured by EBIT margin, provides an indication of operational efficiency; activity, as measured by asset turnover, provides an indication of balance-sheet efficiency. Combined the two ratios give overall ROCE.
Again, this year’s report includes an overview of the major sectors in the economy to demonstrate the effect that differences in business models have on profitability, activity and overall ROCE performance.
Following the release of Armillary’s Circular Economy thought piece in September 2018, we have investigated the correlation between Return on Capital Employed (ROCE) and ESG scores provided by Harbour Asset Management (Harbour). Harbour is a thought leader on ESG performance in New Zealand and we thank them for their support in creating our Spotlight Feature this year.
We continue to advocate the ROCE methodology in our work with businesses as a simple to use and easily understood tool for measuring business performance, identifying improvement strategies, creating incentive remuneration programs, and for testing budgets and forecasts, especially those applied in valuations. We also see the data and results in this report as providing useful benchmarks for business performance in the New Zealand market.
We trust that the insights contained in this report provide value to investors, business owners and managers alike.