Thread by @RamBhupatiraju

Excellent in-depth article on the topic of "Capital Allocation".

Very useful stuff for individual investors also in judging the Management quality.

icgn.org/capital-alloca…

Good overview. ⬇️

Investor perspective ⬇️

Article gives a comprehensive view from both the Company's & Investor's perspective on how Capital Allocation decisions can be judged and how they can be improved from a Corporate Governance and Communications point of view.

In my experience, these are the commonly seen issues/results from incorrect Capital Allocation decisions.

1. Organic growth : Companies not identifying opportunities and not allocating well to R&D and (Growth/Maintenance) CapEx to sustain or strengthen the competitive position.

2. M&A : Overpaying for acquisitions (Empire Building, wrong strategic acquisitions...) and eventual value-destruction in most cases.

3. Debt : Over-leveraging the Balance sheet (when metrics like Debt/EBITDA are already high) to the detriment of Shareholders in many cases.

4. Dividends : Continuing to pay them (fearing Investor community reaction) even when they can't be covered by cash flows and thereby financing them by reaching into Cash balances or issuing new debt.

5. Stock Buybacks : Doing them only when the Business confidence and stock price are high. Doing them only for the sake of reducing share count (while not being compared to other opportunities), to boost EPS and meet Executive Bonus targets.

Right now, there's too much focus on stories and hype, but in normal times, this is what investors should focus on. If Management is making the right Capital Allocation decisions to sustain the Business and also make it stronger for the future.

/END.