Questions About Capital Investment

Most companies incorporate five basic building blocks into their financial reporting: the two sides (active and passive) of the balance sheet including the asset register, a profit-and-loss statement, an investment plan or budget, and some form of competitive benchmarking. Recently, shareholder-value-management indicators have been added to the list. These six measures answer some basic questions:

  • How much capital do we have, what kind is it, how much did we pay for it, and how much is it worth now? (from the active side of the balance sheet, supported by the asset register)
  • How productively are we using our capital, how will we reward equity capital, and what will our debt capital cost? (from the profit-and-loss statement, in relation to the balance sheet)
  • On what basis is capital provided? How secure is the capital base – is the financing long-term or short-term? What reward structures – equity or debt – have we arranged with capital providers? (from the passive side of the balance sheet)
  • How much and what kind of new capital will we need, what will we use it for, where will it come from, and what returns can we expect? (from the investment plan)
  • Do we use our capital more productively than our competitors do? (from competitive benchmarking of financial returns)
  • How much value are we creating for shareholders with our current level of return on capital? (from shareholder-value-management indicators)

Source: Valuing the Assets of the New Economy / Felix Barber, Ralf Dreischmeier, Ulrich Villis / Boston Consulting Group (BCG), October 15, 2000

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