When facing the challenge of improving the total shareholders ’return (TSR), most executives fail to grow. But as much as investors can grow, they want to see that companies can manage capital efficiently.
Various tracks to TSR
For a deeper understanding of the relationship between growth and investment in capital and TSR, EY professionals recently analyzed the value of the S&P 500 using the special cash flow form.
We challenge the results of the traditional wisdom, as it reveals different paths sharply to the positive TSR depending on the company’s return on the invested capital (ROC).
For the study, we divided the sample companies into high and low groups, based on the average return on historical investment over the period of three years, 2021-2024, then examined how each group did with TSR. (The analysis included 360 companies from the S&P 500, but it excluded the financial services sector, and the companies that entered or exited from the S& P 500 index during the monitoring period, and some companies in the sectors are still strongly affected by the disruption of Covid-19 at the beginning of the period, such as flight operators, airline and casino companies).)
The turtle opposite Hair, locust opposite the ants
Lessons of analysis reflect the ethics of two sheep: “turtle and rabbit” and “The Grasshopper and the Ant”.
For companies with low investment – the turtle and rabbits, the race towards a common goal – the priority must be to win the right to grow by improving their ability to obtain the greatest value of their investments. Meanwhile, companies with a return on the return of the return on investment – locusts and ants, each of which must take opposite strategies – give priority to spreading new capital in attractive returns.
The results of the survey have deep lessons for companies in every quartet of the return on high or low investment or TSR.
Low investment companies: turtles and rabbits
• Like a turtle that wins the race by fixing a fixed definition, companies with a low investment succeeded in improving investment efficiency and focusing on the disciplined fixed growth.
• In contrast, the rabbit represents excessive confidence: companies with a low investment that continued to chase growth without treating basic deficiencies.
• Over time, turtles outperformed rabbits by focusing on strategic improvements.
Companies with a high investment: ants and locusts
• Like an ant, companies with high investment are disciplined, organized planners. The profit margins are systematically grown through the exact investments in high -yielding opportunities, achieving the maximum benefit from their high strength to push sustainable growth in TSR.
• Like locusts, other companies that started with high resources of the return on investing in low -yield assets, destroying the value of shareholders and decreasing TSR.
• The steroid approach in locusts contrasts sharply with the strategy of the center.
Turtle: re -growth
The turtle companies succeeded in the survey by dealing with the low return on investment as a highly priority concern. It has reduced the deployment of capital (TSR 15 points) and improving the return on investment by 44 % through a range of better capital efficiency and increasing profit margins to create a 59 % net contribution in TSR.
Rabbits: Do not go anywhere fast
On the contrary, rabbit growth companies have multiplied by spreading much larger capital in weak companies (56 %, compared to 15 % for the turtle), although the return on investment has decreased. The return on the continuous and continuous investment compensates for the value of investments (-26 % effect).
The net effect of these factors was that TSR grown only half as long as slow but fixed (30 % compared to 59 % effect). Investor concern about the approach led to an additional effect of -39 % TSR with a decrease in expectations, which led to a total of 9 % TSR. The lesson is that executives cannot get out of the low return problem without showing capital discipline first.
Ants: investment carefully
What about the leaders of the return to investment? What should they do to keep the results?
Lested companies should invest in increasing the return on investment in order to grow – but you must do so in a disciplined way in order not to reduce the return on the powerful feet. The data shows that companies in this category are very different in their ability to do so.
Both high-risk artists- ants and locusts, respectively, have published more capital and grew sales. Ants did this by investing with maintaining or enhancing capital efficiency and margins, gaining greater confidence for investors and increasing TSR by 73 %.
Locust: the advantages of disperse
The results of the low tsr chip, locusts, show that getting a costly error. These companies have deployed capital at high levels (84 points compared to 61 shareholders in TSR), but the low return on investment denies the benefits by -74 points. Investors again reduced their expectations (effect -20 points), which led to only 10 % TSR profit, compared to 73 % for ants best performance. The gendarid companies were wasted the return on high historical investment by investing in an ineffective investment and lost the confidence of their investors.
To become ants and turtle
To find their paths to positive TSR, companies need to take two steps:
Understanding ROIC
Leaders must determine whether they have the right to grow by assessing the effectiveness of their use of public budgets, although the main criterion is whether the return on stability exceeds the cost of capital. Depending on the place where they land, companies that use this measure can choose one of the two successful tracks.
Choose your way to success
Companies with low investment should simulate the turtle, with a focus on improving capital efficiency and margins, such as restructuring units with weak performance, stripping uninterrupted assets, or making operational improvements. When ROIC exceeds the cost of capital, they have the right to invest for growth.
Companies that already have a healthy public budget and return on the return on investment have more options than others. But it should be methodological, like ants in myth, by making smart investment decisions that build future value and avoid dispelling their interest.
Read the full EY research report End the right to grow And learn more about how to help the companies EY teams to re -visualize their institutions and growth strategies with a deeper understanding of the creation of value.
Mitch Berlin He is a partner and vice president of Americaas, strategy and transactions, at Ernst & Young LLP.
Whit Butler He is a partner and vice president ay Americanas, consulting, at Ernst & Young LLP.
The views that are reflected in this article are the views of the authors and do not necessarily reflect the opinions of Ernst & Young LLP or other members of Global Ey.
