Brad and I had another good time with our GE crew. The MDC (Management Development Course) we do for GE is always lively. This group was even more lively than most. They scored about 65% on the pre-test a high for us. The group was loaded with questions and pretty tough ones.
One thing that comes up with GE is ROTC. That stands for return on total capital or also known as ROCE (return on capital employed) or ROIC (return on invested capital) or RONA (return on net assets). This ratio is an important one for any business. Granite Construction (see last blog) used RONA while GE calls this ratio ROTC. They all really measure the same thing.
These ratios measure how much money a business makes relative to the other peoples’ money they use to run their business. A simple version of the equation is Profit adjusted for pretax interest expenses divided by all of the interest bearing debt and equity on the balance sheet. So if a business borrows money at 5% and its investors expect a 12% return and they have 50% debt and 50% equity then they had better get an ROTC/RONA of better than 8.5% (a weighted average of the debt and equity). If this business does not beat that percentage year after year, then the business is asking for its debt holders and equity investors to take their money elsewhere. Consequently, this is a ratio that a well-run business should keep an eye on.