Accurate measure of corporate performance

WHEN companies talk about performance, a wide variety of metrics are often quoted. Earnings growth, earnings per share, net profit, EBIT and return on capital are all examples of metrics shareholders can expect to hear about over the reporting season.

While all are legitimate insofar as they reflect a level of performance – most often – some way down the income statement, shareholders are often confused by the variation between these reports and their intuitive sense for how their investment in the company has performed.

Total Shareholder Return (TSR) is the peak measure utilised by value-based advisers world-wide when it comes to measuring corporate performance, and we assess both every WA listed company and the ASX200 companies, annually.

Simply put, TSR captures dividends, capital gains – through share price appreciation – and any dilution effects that may have occurred over the measurement period. The measure can be calculated for any time period and, assuming a level of dividend re-investment, accurately reflects the performance of companies in increasing the wealth of shareholders.

If we look at the single financial year performance to June 2001, the All Ordinaries Accumulation Index showed an 8.8 per cent TSR. Just more than half the ASX200 companies were able to match this level of performance. By comparison, the All Ords displayed a 16.5 per cent return for the previous financial year, and just 51 companies matched this performance.

This is partially explained by the sharp reversal in News Corporation, whose TSR performance fell from 78.8 per cent in FY00 to – 21.5 per cent in the 2001 financial year.

As an example of alternative industry performance, consider the opportunities flowing in the building materials sector with a 46.7 per cent TSR for the 2002 financial year, retail with 34.2 per cent and banking with 32.9 per cent. Bristile, Wesfarmers, Woolworths, FAL and ANZ rewarded shareholders with outstanding levels of returns.

Alternatively, consider the likely messages from telecommun-ications with -30.9 per cent and media with –22 per cent, representing significant reversals in performance. SecureNet, KeyCorp and ERG all delivered TSR performance of -65 per cent or worse.

The strategic and financial imperatives for these firms will be significantly different from those in the winning sectors.

So, as a listed company CEO, investor, or portfolio shareholder, it’s worth giving some thought to your expectations for equity investment performance. During the past year, 8.8 per cent was the benchmark, almost half the year previous. Clearly, however, there was significantly varying sector performance.

Many listed company managers or investors spend far too much time in risk adjusting their investment hurdle rates, often tuning these numbers to the second and third decimal place.

The focus should really be on developing and maintaining a very solid understanding of industry economics and framing winning strategies in the face of those dynamics.

Companies can communicate any range of financial performance metrics. In reality, TSR performance provides the most compelling and consistent measure, which links directly to the experience of shareholders. TSR performance also provides a very clear indication of future credible strategic options for listed companies.

We receive regular queries on a wide range of corporate advisory topics. If there is a topic of particular interest or query that you would like covered within this column, please feel free to email the writer at or drop a line to the editor at Business News and we will attempt to respond at the earliest opportunity.

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