Why Current Profitability Measures Destroy Billions in the Industry
19 Pages Posted: 8 Sep 2005
Date Written: August 29, 2005
I have worked for many years as senior consultant and advisor for the majority of European Pulp&Paper companies, the majority of Nordic Packaging and Nuclear companies and other industries, and have found that values corresponding to billions of dollars are destroyed in the industry. Not because market assumptions etc are incorrect - that is one item that always will be uncertain - but because the industry's view on financial performance has consequences that are extremely costly to the shareholders. Examples of costly consequences are:
1. It is difficult to identify where the company should be expanding and where it should improve the current business. The company does not grasp the expansion opportunities it has.
2. The renewal of the business is too slow, low propensity for renewal.
3. Low performance is cemented The reason for this money-wasting is profitability information based on accounting.
Keywords: profitability, EVA, CVA, NPV, investments, decisions, allocation, capital
JEL Classification: G30, G31, L10, L20, L21, L73, M10, M41
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