Measuring Financial Performance: ROCE

I saw this all happen with the Tech bubble, tech firms offer the world, IT departments persuade business to buy tech and Execs dive in for the FOMO (Fear of Missing Out).

Execs forgot that they were there to make a profit and were led by the nose, Some lost millions, some went bankrupt, and a small portion took over the market.

With AI which path will you follow?

I thought I would do a post on should you invest in AI, put your money in the bank, or invest it somewhere else?

Before I answer this question, lets look at a fundamental measure of business performance:

Return on Capital Employed (ROCE). ROCE = Operating Profit ÷ Net Capital Employed × 100%

In simple terms, how much operating profit does the business generate for every £1 of capital employed?

Now apply that thinking to AI.

Imagine your business invests £100,000 in an AI solution.

The investment generates an additional £25,000 in annual operating profit, after allowing for its ongoing operating costs.

Thats an illustrative 25% annual return on the £100,000 invested. Sounds attractive?

Perhaps.

But what else could you have done with that £100,000?
– Invested in staff, equipment or business development?
– Improved existing processes without AI?
– Kept the money in the bank?
– Invested in another opportunity with a better risk-adjusted return?

And what about implementation risk, hidden costs, uncertain benefits and the time it takes to realise the returns?

The real question isnt whether AI can deliver benefits. Its whether those benefits justify the investment.

Of course, a bank deposit and an AI project carry very different risks, and a simple return calculation isnt a complete investment appraisal.

So, before jumping on the AI bandwagon, ask yourself:

Are you investing in AI because it creates measurable value, or because everyone else seems to be doing it?

Don’t think AI = Cost reduction, read my earlier post on “Think Growth, not just cost reduction”