Return on Capital Employed Report
We are delighted to present the tenth Armillary Private Capital Return on
Capital Employed (‘ROCE’) report. This year the total number of entities
in our data set of NZX, USX, and selected Crown entities is 142.
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.
Analysis has primarily been conducted using the Pitchbook financial
platform and where data was not available, information was entered
from annual reports. EBIT has been calculated on a normalised basis,
adjusting for non-recurring items and non-trading items, including
(but not limited to) gains/losses on asset sales, revaluations, and
unrealised gains. Previous years’ reports were compiled using the CapIQ
data base, and so prior year results may differ slightly to previously
published results.
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.