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Despite China’s ever-changing and challenging operating environment, private equity investment has dramatically expanded in recent years. However, investors are increasingly concerned about seeing real returns from these investments since companies operate in an environment where costs are rising rapidly, customer needs are constantly changing and investor and management teams are not always aligned.
In this new Executive Insights, L.E.K. Consulting recommends that investors focus on the Return on Assets (ROA) ratio to measure the interaction between profit/sales and sales/assets ratios. ROA is a velocity ratio which measures the speed at which high- and low-margin sales are generated from a company’s asset. The ROA ratio also provides granular detail of day-to-day business operations, so that managers can use it as a yardstick to measure and manage the impact their day-to-day and deal-by-deal choices and trade-offs have on profitability and growth.
This idea is fundamental to growing shareholder equity and wealth so that Chinese companies can maintain profitability in the face of increasing cost structures.