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I once worked for a company that was proud of its capital projects and how the completion of such projects added to the assets of the company. The next company I worked for was proud of its return on investment (ROI) and had a philosophy of investing as little as possible in capital projects, for such investments drove down the ROI.

This seems like a conundrum, but there are always other details that need to be explained to understand such matters. In the case of the first company, the economy had just come through a phase of near hyper-inflation. It was cooling, but not gone from managers' and investors' memories. Thus, the unspoken portion of their pride in assets employed was the idea that assets purchased today are much cheaper than assets purchased tomorrow, and, indeed, of the selling price of goods manufactured tomorrow. Hence, producing goods tomorrow with cheap assets acquired today makes sense, as compared to competitors who may be buying assets as they go. The perceived cheaper assets were viewed as money in the bank.

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The second company was not a stand-alone pulp and paper company. It was wholly owned by a conglomerate that was involved in many different businesses. The only way to measure the performance of each of the disparate companies owned by the conglomerate was by looking at ROI. Further evidence of this was the desperate desire of these separate companies within the conglomerate to look as good as possible, thus the measurement metric was not simple ROI, it was something called RONAE--return on net assets employed. In other words, the return after removal of depreciation. Such a method completely discouraged the deployment of new assets, for such a deployment would raise the asset base and lower one's RONAE. By the way, RONAE figures in the 80% range were common--a facility wasn't even considered good unless it was above 70%.

This was a long time ago. What happened to these two companies? Interestingly, the first one has completely gotten out of the grades of paper for which it was known at the time. It redeployed assets, merged with another company, merged again, and is now not even recognizable as a participant in the grades of yesteryear. The facility in which I worked has been idled by a second owner since those days and I sincerely doubt that it will ever start up again.

The second company survived a split-up of the conglomerate and a spinoff of a portion of itself. It is a stand-alone publicly traded company now. It has managed to keep its old assets running, but one of its facilities has a particularly poor safety record and has had several fatalities over the years. Yet, as a whole, the company is a darling of Wall Street.

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So what happened in both of these cases? Why these results? Management focused on the part they could control--deployment of assets--and operated in a "best guess" mode on the portion of the equation they could not control--markets for their products. In fact, when I was involved with both of these companies, the Internet was a long distance in the future, yet, in both cases their returns on investment were drastically affected by the Internet--the first in a negative way, the second in a positive way.

The moral of this story is this: you can play with investment calculations all day long, but in the long run markets are going to determine what the real calculation will be.

For our quiz this week, we have one simple question meriting a yes or no answer. Have fun with it as you take it here.

For safety this week, don't ever forget to take care of your most important assets--people. Do everything you can to keep them safe.

Be safe and we will talk next week.

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