Translating Strategy into Shareholder Value: A Company-Wide Approach to Value Creation
|
Realistically, what would the ROA change be? It would be a combination of both a decrease in the cash flow margin and asset turnover. If the impacts we described above were combined, the result would look something like Exhibit 7-6.
Exhibit 7-6: Effect of a decrease in both cash flow margin and asset turnover on return on assets.
| Cash Flow Margin |
| Asset Turnover | = | Adjusted ROA | |
|---|---|---|---|---|---|
| Your Company | 12% |
| 4 | = | 48% |
| Combined Companies | 10% |
| 3.5 | = | 35% |
The result is a decline of 13 percent in ROA. Drops in ROA are a normal short-run occurrence in M&A activity.
|