Capital Allocation: Results, Analysis, and Assessment - DSA ADS Course - 2023

DSA ADS Course - 2023

This DSA ADS course is part of a series of courses that demonstrate how to use applied data science with high performance compute and high quality data to optimize decision making in real world investing / trading scenarios.

Discuss how to use applied data science to make optimal capital allocation decisions.

Discuss capital allocation decisions for investors / traders. How to assess management's capital allocation skills? Discuss asset allocation, asset selection, and rebalancing.

Discuss capital allocation decisions for executives / managers. For management, which forms of allocation tend to add value and how to avoid common mistakes.

Discuss the five (5) Principles of Capital Allocation:

1. Zero-based capital allocation;

2. Fund strategies, not projects;

3. No capital rationing, but earn sufficient returns on the capital you use;

4. Zero tolerance for bad growth; and

5. Know the value of assets and be ready to take action to create value.

Discuss analysis of investment SG&A ex-R&D.

Capital Allocation: Results, Analysis, and Assessment  -- December, 2022


The primary job of senior management is to create value over the long term. This entails taking inputs, including capital and labor, and making them worth more than their cost over time. Capital allocation, which describes how a company raises and spends money, plays a central role in value creation. Successful capital allocation creates lasting value for all stakeholders and can achieve other goals as well. But management’s ultimate focus should be on increasing long-term value per share.

Creating value ought to be an imperative for at least two reasons. The first is competition. A firm that does a poor job of managing its resources will lose in the marketplace to a company that is managed better. The second is consideration of the opportunity cost of capital. Companies have to explicitly acknowledge that all capital has an opportunity cost, the rate of return they could earn on the next best alternative. Capital that fails to earn the cost of capital over the long term destroys value and imperils a company’s prospects for prosperity. Even though capital allocation is the most important responsibility of the chief executive officer (CEO), not all know how to do it well. This is in large part because the skills that enable someone to become a CEO may not be the same as those that make that person effective at overseeing how capital is raised, managed, and disbursed. Indeed, new CEOs commonly have the same functional background as the outgoing ones, and the experience of most CEOs is in general management.

Warren Buffett, chairman and CEO of Berkshire Hathaway, the multinational conglomerate, gets to the point: “Once they become CEOs, they face new responsibilities. They now must make capital allocation decisions, a critical job that they may have never tackled and that is not easily mastered.”

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