Accounting is often defined as the language of business, a language that is unfortunately incomprehensible to a lot of people. In the business world, however, it’s important to be able to interpret the numbers in order to keep your company functioning at its peak performance level. But metrics that measure business performance can be manipulated: we see it in our simulation exercises, and it happens in the real world, too. So how can you be sure that your metrics haven’t been improperly adjusted?
Jack Ciesielski, author of highly-regarded newsletter The Analyst’s Accounting Observer, proposes a new twist on the old Return On Assets method (ROA): Cash Operating Return on Assets (COROA). COROA assesses Operating Cash, produced by all the money invested in assets (plants, equipment, inventory, cash, etc.), not simply Net Income, and gives even deeper insights into how shareholders’ money is being spent and whether that spending is actually generating cash. For example, a high COROA, or one that is improving, suggests that the management team is using capital in the right ways. In contrast, a low COROA means that you should probably have a serious talk with said management team about how they are allocating company resources.
Ciesielski analyzes Honeywell’s performance in the aerospace and defense industry relative to companies such as Raytheon, United Technologies, and General Dynamics, and finds that Honeywell’s COROA passes “the Warren Buffet test of value.” If you’re interested in learning more about a metric that might not be as easily “gamed,” click here to read about Cash Operating Return On Assets.
PriSim Business War Games Inc. runs and designs customized business simulations that teach decision-makers about business, strategy, finance, and leadership.