Companies Need to Focus More on Cash Flow and Return on Capital

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“If you attempt to assess intrinsic value,” investor Warren Buffett once said, “it all relates to cash flows. The only reason for putting cash into any kind of an investment now is because you expect to take cash out.”

The study revealed that many organizations focus too much on their profit and loss statement and not enough on cash and return on capital. As with the findings on executive compensation, the results were puzzling. Executives discussed cash and ROC infrequently, citing “cash” only one-tenth as often as other financial metrics and “ROC” only one-hundredth as often. The executives cited “sales” and “sales growth” the most by far, in one-third of these mentions, along with “costs” at 17% of all mentions and “earnings” at 21%.

Second, in their dialogues with analysts, executives should continue to emphasize topline growth, but they also need to demonstrate to investors that they are focused on that gradual growth in ROC and on how they will optimize the cost structure and asset base to fund this growth.

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