I’m back for another installment of the Granite blogs. I have not had a training month like this for a while. I am a bit tired but I had another great day and a half of finance with my friends at Granite so it’s all good.
This time the venue was Dallas. Good weather, this is the right time to hit Texas. Another month or two and it gets a whole lot hotter. The venue was a Westin Hotel near downtown and for both nights I ate at Benihana. The first night on my own, the second night with the group. I like the Benihana approach every once in a while…two nights in a row isn’t ideal but it’s still good food. The chef jokes do get old the second time around though. My favorite there is the filet and lobster. As a creature of habit, I had the same things both nights.
Oh yes, then there was the training. This group was a little but quieter than the last Granite group. Especially on the morning of the first day. Things warmed up quite a bit more on the second morning. The big topic of discussion was their key metric RONA or return on net assets. This has been a key Granite ratio for years. At GE they call this ratio ROTC or return on total capital. These two ratios are the same, the number is the same but the way the denominator is calculated is different. It’s interesting that Granite focuses on ROTC while GE and many others focus on RONA.
ROTC and RONA take the net income for the business adjusted up for after tax interest expense in the numerator. ROTC calculates the denominator by adding all of the interest-bearing debt on the balance sheet plus the total equity. RONA, on the other hand, gets to the same number by taking total assets and deducting from it the non-interest bearing liabilities. Thus, ROTC measures the return in profit on the business assuming no debt divided by the total interest bearing debt and equity the business has on its balance sheet. This measures what percentage of profit for a given year was relative to the total other people’s money one uses to run the business. With RONA we start with the assets and then deduct all the non-interest bearing liabilities to get the denominator. Since the balance sheet equation is Assets = Liabilities + Equity, take assets and deduct the non-interest bearing liabilities yields the same number as adding equity plus all the interest-bearing liabilities. Either way you end up in the same place.
In my mind the ROTC approach is easier to calculate. So why the net asset approach at Granite? Here is why it makes sense. At Granite, an infrastructure construction company, getting the job done with minimal assets is key to success. By focusing on net assets rather than total liabilities it gets the project managers focusing on doing it with less assets something they control. One the other hand, these project managers have little to do with how much capital or interesting bearing debt and equity the company carries on the books. So even though the ROTC method might be easier to calculate and understand, RONA does a better job of getting the Granite leadership focusing on what they can control. Pretty cool right! It was a great day and a half of finance in Dallas. Now for a bit of break!
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