INVESTMENT
BRIAN KANTOR: Expand offshore on pure merit, not for growth at any cost
South African business leaders are demonstrating a heightened taste for expansion offshore. That is because the stagnant economy offers them minimal growth opportunities. Yet they are likely to be well rewarded for growing earnings.
Such growth could be helpful to managers. Is it as likely to be helpful to their shareholders? It depends on how much of their capital or debt incurred on their behalf is employed to pursue earnings growth.
Unless the extra cash generated by expansion abroad or domestically can confidently be expected to provide a cash return in excess of the opportunity cost of the extra cash invested (cash in for expected cash out, all discounted to the present with proper allowance for the maintenance and replacement of the assets acquired) the investment should not be made. One wonders how many offshore acquisitions by South African companies can confidently offer local shareholders positive net present values (NPVs). Why then the near flood of such acquisition activity? Growing earnings or earnings per share may not be helpful to shareholders if too much capital has been expended to realise growth in earnings.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.
Subscribe now to unlock this article.
Support BusinessLIVE’s award-winning journalism for R129 per month (digital access only).
There’s never been a more important time to support independent journalism in SA. Our subscription packages now offer an ad-free experience for readers.
Cancel anytime.
Questions? Email helpdesk@businesslive.co.za or call 0860 52 52 00. Got a subscription voucher? Redeem it now.