Using Cash to Drive Profitable Growth, Pt. 1
November '10
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Summary:
US industrial companies have generated record cash balances through the worst downturn since the Great Depression. They have achieved this counterintuitive result primarily by slashing investment and costs.
Companies are not deploying cash for two main reasons
- Continued uncertainty about demand, as well as new regulation and taxes
- Difficulty in finding investments that are both profitable and able to sustain growth
Management knows that the cash must be invested or given back to shareholders but face two challenges: (1) investors have already prices in agressive assumptions for future performance and (2) high levels of volatility have increased the cost of capital raising the bar for value-creating investments
A company that doesn't invest its cash returns above this higher cost of capital and meet investor growth expectations is vulnerable.
Delivering a step change in profitable growth requires a new set of tools and capabilities.