Friday, April 08, 2005

Productivity

The annual Value Added Scorecard from the UK Department of Trade and Industry (DTI) measures the wealth-creation efficiency and labour productivity of UK and European companies. In other words, how much wealth is being created, and how much labour is needed to produce it.

The scorecard measures wealth created in terms of value added, defined as operating profit + employee cost + depreciation + amortisation. (This is roughly equivalent to gross margin - total revenues minus all input costs except the cost of labour and capital equipment.)

Two productivity ratios are defined. P1 is labour productivity - the value added per employee (expressed as an amount of money). P2 is wealth creation efficiency - the value-added divided by the cost of labour and capital equipment (expressed as a percentage).

From all this research, the Investors Chronicle (8th April 2005) spots a practical tip for investors. Over the past six years, a portfolio of companies with growing value-added and above average P2 would have produced investment returns for investors of 139 per cent, while the FTSE 350 index fell by ten percent. In other words, P2 seems to be a good indicator of viability, at least from an investment perspective.

DTI website: http://www.innovation.gov.uk/

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