New Mauboussin Report: Capital Allocation – Evidence, Analytical Models, and Assessment Guidance

Capital Allocation: Evidence, Analytical Models, and Assessment Guidance

Credit Suisse’s Global Financial Strategies team has published a new report, “Capital Allocation.”

  • Capital allocation is a senior management team’s most fundamental responsibility. The problem is that many CEOs don’t know how to allocate capital effectively. The objective of capital allocation is to build long-term value per share.
  • Capital allocation is always important but is especially pertinent today because return on invested capital is high, growth is modest, and corporate balance sheets in the U.S. have substantial cash.
  • Internal financing represented more than 90 percent of the source of total capital for U.S. companies from 1980-2015.
  • M&A, capital expenditures, and R&D are the largest uses of capital for operations, and companies now spend more on buybacks than dividends.
  • This report discusses each use of capital, shows how to analyze that use, reviews the academic findings, and offers a near-term outlook.
  • We provide a framework for assessing a company’s capital allocation skills, which includes examining past behaviors, understanding incentives, and considering the five principles of capital allocation.

mm_capall

See here for a collection of links to other Mauboussin papers.

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