The Missing Metric & Shareholders Pay for ROA

Investors naturally seek the highest rate of return on their investments.

Making money faster from the money tied up in a business has always been the name of the game.

When investing in complex, capital-intensive manufacturing businesses, this means finding ways to generate profit as fast as possible from expensive production facilities despite the many challenges that complexity breeds.

Given investors’ intense focus on the speed of money—-how fast dollars are being produced by the assets they own—-it would be reasonable to assume that every manufacturer measures and manages in great detail exactly how fast (in dollars per machine hour) profits are being produced by their production equipment.

However, virtually none have the tools to precisely measure this metric. This incorrect assumption has tremendous implications for shareholder’s return on assets.

Rather than running their business by focusing on profit per machine hour, manufacturers worldwide instead pay closest attention to the profit per product unit of the products they sell. In fact, very few manufacturers are even able to measure the profit per hour generated by their equipment. Most have never even tried.

This is why we refer to “profit per hour,” or Profit Velocity, as the “Missing Metric.” Speed of money-making may be paramount to investors, but with few exceptions, manufacturers do not even attempt to measure - and therefore cannot manage - the result that matters most to their investors.

On the surface, it would seem rather simple to calculate profit per machine hour to learn which product items, customer orders, market segments, etc. yield more money from the precious time they use passing through production equipment. But until recently, measuring and managing profit per hour in enough detail to make the Profit Velocity metric useful in decision-making has been too difficult to put into management practice.