Is it possible to measure “real-time” value creation? Imagine if you could tell straight away if a business was creating or destroying value. And then imagine if this was a simple and straight forward process. Take 10 seconds now to close your eyes and think about what this information could allow you to do.
Knowing where value is being created allows you to optimise capital allocation. You might be an investor buying shares or lending into a business, or you might be in the corporate environment and considering which strategies and business lines you should back. You might be setting performance targets based on creating value, not just profit.
But to date we do not have particularly good tools to identify value. Despite the best efforts of the finest minds in the field of corporate finance over decades of research, we are still surprising bad at measuring it. For example, it is well documented that earnings-related measures are poor reflectors of value. This is largely because they are short term in focus, accruals not cash-based, and, let’s face it, easy to manipulate.
But at the same time, they are easy to calculate and are widely recognised, if not often fully understood. The alternatives for measuring value can drive you down complex and theoretical routes which few understand and only result in a marginal gain in insight.
This is where a newly developed value performance framework steps up to the plate. The framework is called Capital Performance Insight or CPInsight™. It is simple, intuitive and powerfully effective. Researchers at Birmingham University have shown financial performance measured through the CPInsight framework tracks far more closely changes in value in FTSE100 companies than those changes predicted by traditional metrics such as earnings per share (Eps), return on capital employed (ROCE), or EBITDA multiples.
Birmingham University’s findings support CPInsight as a pre-eminent measure of financial performance.
What are the practical implications of this? Well, those that can spot and measure value performance more accurately can make better capital allocation and investment decisions. They can set better performance targets. They gain a competitive advantage over those still tied to traditional, less effective ways of assessing financial performance. Everyone has a stake in this game: corporates, investors, private equity, consultants, advisers, regulators and standard setters.
The real beauty of CPInsight is its intuitive simplicity. The researchers at Birmingham were able to evaluate the framework from a handful of data points readily available from published financial information. The framework is not a new theory; it is simply a new and better way of analysing these data points. A further aspect to its simplicity is the ease with which the principle behind it can be understood: all the framework seeks to do is match capital spend to the period it impacts.
CPInsight has been developed by a practising treasurer in response to the consistent drive to improve cash performance. At its core cash performance is optimised when the value created from the deployment of capital is maximised. If you can measure this, you can manage it. That’s what CPInsight does.
Ben Walters FCT has many years’ experience in the field of treasury strategy and is currently interim group treasurer at Robert Walters PLC
A summary of the findings of the studies conducted at Birmingham University are shown below:
“CPInsight metrics provided clearer signals of value creation and destruction, consistently outperforming traditional measures in predictive accuracy.”
“… Importantly, CPInsight was shown to be both practical and feasible, as it can be calculated using publicly available data with only minor adjustments.”
“The statistical testing indicates that CPInsight metrics consistently demonstrated a closer alignment with EV changes compared to traditional measures.”
“Unlike frameworks such as EVA or CFROI, which often require complex capitalisation of R&D or inflation adjustments, CPInsight uses inputs readily available in published data.”
“Rather than rewarding firms for legacy asset structures, CPInsight focuses squarely on the efficiency of new capital allocation, thereby providing managers and investors with a clearer sense of whether fresh investments are creating or destroying value…. It relies only on universally available data inputs such as EBITDA, tax charges, and capital expenditure, making it both transparent and easily replicable across firms and sectors. This simplicity enhances its potential adoption in practice, not only by managers and boards but also by investors and regulators seeking consistent benchmarks.
“For practice, CPInsight offers managers a robust decision-making framework, investors a screening mechanism, and policymakers a tool for reforming corporate disclosure.”
