apr-11.pdf (2.07 MB) - Crown Ownership Monitoring Unit

F igure 14 – Net operating profit disaggregated vs capital charge$m■ NOPAT (excl Revals) ■ NOPAT – revaluation component — Capital Charge — Capital Charge (excl Revals)Source: EY SOE Economic Portfolio Analysis, November 2011The EY rationale for including asset revaluation gains and losses is that they representwealth gains for the period and will impact on return expectations in subsequentperiods. However, including revaluation gains and losses can create distortions asrevaluations can be the result of:• inappropriate asset values assigned to companies at the start of the analysis period• external factors, independent of management, that impact upon underlying assetvalues (the Maui gas reserve redetermination being a real example), or• assets appreciating in value through good strategic decision-making by Board andmanagement.It is difficult to assess the extent to which revaluations are attributable to each of theabove. If revaluations capture all, or substantially all, of the market value of the entity,inclusion of revaluation gains and losses will give a closer approximation of the trueshareholder return (excluding dividends).Accordingly, there is merit in a parallel analysis of economic profit which incorporatesrevaluation gains alongside that which excludes revaluations gains....EPs are generally positive both including and excluding revaluation gains...Simplistically, an EP is achieved when the return on invested capital exceeds the WACCcorresponding to the risk profile of the business. A riskier business attracts a highercost of capital, and therefore needs to produce a relatively higher return in order toachieve an EP.page | 33