Open Ended Question on Return on Investment

Published on Tuesday, 3 September 2013 17:27:32    Written by Marc
Do you evaluate how much the capital expenditure (capex) spent has actually brought back in return over time?

About 10 years ago, the CEO of the company I was working for actually made a similar comment. I had been with the company only one year and this was my first budget review alongside a bunch of VP’s, senior VP’s, president of sectors, the CEO, as well as some head office executives.

DSC00150At some point in the meeting, the conversation turned to the amount of capex that we were distributing to the various business units of the company, with each sector or group claiming the largest possible chunk of available capital for themselves. I am fairly certain this is the case in any large company.

In reviewing the annual capex budget for one group of business units, our CEO made a sudden and unexpected comment, “Guys, over the past five years we must have invested close to 100M in your sector, can any of you tell me what was the return on investment for each of these capex investments was?”

“Huh?”

“I repeat, does anyone know how much money each specific capex invested in that group of business units brought back to the company? “

Amongst all the executive management around the table, no one had an idea. Some guys in finance where trying to utter comments about how the business units were doing but the CEO insisted, “No, no, I am talking about what is our direct return on investment on each capex, how much money did we make specifically because of the capex we invested there?”

Of course, with no real postmortem done (as it is often the case) and no real tracking system in place, no one at the table had any idea.

I remember how shocked I was that no one around the table knew the answer to our CEO’s question. Of the more than 15,000 employees in the company, I doubt anyone had the answer either. Even today, close to decade later, that meeting still raises questions in my mind and I am often surprised as to why large companies would not make it standard procedure, to know how much return on their investment each capex gave the company especially when the capex budget is so large!

Yet, most people with investments, or even a small portfolio of stocks will naturally want to know which stocks are performing well, how much they have made, or which ones are doing poorly. So, if individual investors do this, why would large companies, who invest millions, even hundreds of millions (in our case), each year would not track how much the spent capex brought back in return?

The funny this is, I am still seeking answers...