Across all BUCS big data solutions, the common element is value, and more specifically, value driven by cash flow. In our experience, many managers, especially of middle market companies, tend to focus more on accounting measures. More specifically, those measures tied to the income statement, such as top line revenue growth and profit margins, such as gross, operating and net income margin. If the balance sheet is considered, then the most common financial measures tend to be return on equity (ROE) and return on assets (ROA). While these accounting measures may provide companies with a straightforward method for calculating returns, these measures fail to account for the risk associated with the investment. In other words, an investment might increase these metrics, but still destroy value when accounting for its risk.
At BUCS, our analytics focus is on return on invested capital (ROIC), as true value-based returns need to be measured against both the capital invested to generate the return as well as the risk associated with such investment. To adjust the return on invested capital for the risk of the investment we evaluate the corresponding cost of capital, or weighted average cost of capital (WACC). The difference (ROIC – WACC), often called the excess return, is then multiplied by the capital invested to calculate the economic value added (Stern Stewart & Co., EVA®) in a given period.
BUCS Analytics solutions allow for unprecedented macro and micro multi-dimensional visibility into both the income statement return drivers as well as the invested capital (which may take the form of net working capital, fixed capital investment, intellectual property, acquisition investment or other off-balance sheet forms of capital) allocated to such positions. Like a good portfolio manager, a CFO should understand the risk profile of the overall business as well as the individual business units and product lines, as capital allocation decisions are made pertaining to working capital and long term investment. With BUCS, it’s easy to spot winners and losers, allowing managers to make informed decisions to drive individual and overall returns on capital to desired levels.