Future profitability describes the ability of a company’s asset base to generate revenue within the operating model required in the future. The time horizon is five to seven years. Two questions are central to this:
- Which assets underpin future profitability?
- Which assets will no longer be productive for the future business model?
Consequently, the TSR may be high even though the earnings base is already declining. Even stable margins can mask a shrinking base: For example, a company may be drawing down its reserves or postponing necessary investment in maintenance, development and innovation. A separate measurement of future earning power can highlight this trend before it is reflected in turnover, margins and cash flow. This gives the supervisory board time to take countermeasures.
But what happens if the earnings base weakens? Then the costs of maintaining day-to-day operations may rise. The company must increasingly deploy capital to maintain its existing operational base, rather than investing in the conditions necessary for future growth. At the same time, the return on invested capital may fall and approach the cost of capital. If it falls below the cost of capital, the strategic scope for action is significantly restricted. This development is signalled by early warning signs.
Three early warning signs indicate that a company is weakening its future earnings base.
- First early warning sign: The cost of securing the operational base is rising. The output side of the business model remains unchanged. The margin comes under pressure because the output side has yet to translate these investments into revenue.
- Second early warning sign: Investments are shifting from building future profitability to maintaining the existing business. In the profit and loss account, both look the same.
- Third early warning sign: The return on invested capital is falling, whilst the weighted average cost of capital remains stable. Those who recognise this early on can take strategic countermeasures. If the return on invested capital falls below the cost of capital, companies often have to react defensively.
The situation becomes even more challenging when the return exceeds the cost of capital, cash reserves are substantial and the capital tied up in operating activities is low. The traditional key figures then give the impression that the company is in good health. However, even behind these positive figures, a weakening earnings base may lie hidden. Only an additional metric can reveal whether this is the case.
In three steps, you can systematically assess how your future earnings base is developing.
Step 1: Set a reference point.
First, answer the following questions:
- Which markets will we need to serve in five to seven years’ time?
- What resources do we need to secure to achieve this?
- What capabilities do we need to generate revenue in these markets?
The answers to these questions can be found in the Target Operating Model. Check each key asset against this model: Will you generate revenue with the respective asset in the future business model? ‘Yes’ means it forms part of the revenue base. ‘No’ means the capital is deployed elsewhere. It is important to note that the balance sheet reflects the assets of the existing business model. If you change the Target Operating Model, you must also restructure these assets. This affects financial performance. And it determines how quickly your company can adapt.
The revenue base comprises all assets with which a company generates revenue in the future business model. These include plant and equipment, products in use by customers, service and spare parts networks, as well as capabilities and customer relationships. It is measured using the Asset Preservation Multiplier, a metric developed in-house as part of the Rethink Value® Framework.
Step 2: Measure the direction.
In the next step, compare the earnings base at the start and end of a period. If it has grown, your company has strengthened it. If it has shrunk, it has weakened it.
Here is an example:
Two successful financial services providers operate in the same sector. But what distinguishes their success? One achieved a TSR of almost 40 per cent in the 2025 financial year. The market regarded it as a winner. However, measuring the earnings base reveals a risk to its capital base. The other provider achieved a TSR of 17 per cent, which is less than half. In return, it made targeted investments in risk prevention for its customers, thereby expanding its earnings base.
A supervisory board that considers only the return on investment will rate the first company more highly. A supervisory board that also considers the earnings base would reach the opposite conclusion. This is because every strategic decision has an input side and an output side. If a financial services provider invests in services that prevent losses for its clients, it strengthens its earnings base on the input side. If it earns revenue on the output side – for example, through advisory fees – a closed loop is created: Customers keep their equipment in operation for longer, and the financial services provider benefits from this stability.
Industry follows the same logic: those who take back, recondition and resell products are investing on the input side and can earn on the output side.
At present, it can be observed that for many large companies, the output side is set up as pilot schemes or innovation projects, whilst the input side operates on an industrial scale. Companies therefore remain cautious on the output side. As long as this does not change, the company ties up capital on the input side, which it must first recoup on the output side.
3. Step: Embed the measurement process within the supervisory board.
Transformation projects usually extend over longer periods than executive board mandates last. Defining the earnings base should therefore be the task of the supervisory board. A similar separation of powers has long been established in financial reporting. This alters the mandate issued by the supervisory board and the criteria to which the executive board’s remuneration is linked. In Europe, regulatory pressure is increasing the need to have a metric based on audited financial data. The TSR therefore requires a second key performance indicator: the Asset Preservation Multiplier. If the two KPIs diverge, the company is generating returns at the expense of its earnings base.
Asset Preservation Multiplier
The Asset Preservation Multiplier draws on three figures from the annual report, which are weighted differently depending on the sector. For a financial services provider, these are the quality of capital deployment, the duration of client relationships and revenue from services that preserve clients’ assets. For an industrial company, these are the proportion of recycled material, the service life of plant and products, and revenue from services and reprocessing.
These are the two key advantages of the Asset Preservation Multiplier:
1. It reveals whether the earnings base underpinning the return remains intact.
2. It enables the Supervisory Board to decide to link the Executive Board’s remuneration to the Asset Preservation Multiplier in addition to the TSR. In this way, the supervisory board can identify which levers strengthen the earnings base.
The calculation basis for the Asset Preservation Multiplier has undergone an initial actuarial review and is to be subject to an actuarial review every two years. Backtesting confirms the method: three companies that the Asset Preservation Multiplier classified as being in the zone with the highest risk to the asset base became insolvent within twelve to 24 months.
In addition to the defined earnings base, two further elements should remain stable across management changes: the Target Operating Model and the interpretation method. The interpretation method specifies how the key figures in the annual report are to be interpreted:
- Which items count?
- Which documents do they come from?
- And how are missing data points handled?
Adjustments require a documented justification, a bridge analysis and retrospective application to the time series.
Why is this important? These three elements ensure the validity of the time series.
- The documented justification makes every change transparent to the supervisory board, the auditors and future management.
- The Bridge Analysis shows which part of a change is attributable to the method and which to the business.
- And the retrospective application ensures that companies measure performance according to the same rules every year.
This means it is no longer possible to feign progress through a new definition, and the comparison remains robust even across changes in leadership.
Divergence is a signal
If TSR and the Asset Preservation Multiplier diverge, the supervisory board should investigate the causes and act accordingly. At present, many companies are disposing of productive assets at prices that fall below the long-term contribution of these assets to the earnings base. The debate centres on value creation. In fact, value is flowing out. In view of geopolitical shifts and increasingly scarce resources, the question is becoming ever more pressing: Is the company building up its future earnings base, or is it eroding it? Institutional investors ask themselves the same question with every allocation decision. To prevent value from flowing out and the future earnings base from deteriorating, it may be sensible to bring in external expertise to the company.
When does it make sense to seek an independent external perspective?
There are three situations that call for this:
- The Asset Preservation Multiplier consistently confirms management’s position. This is precisely when an independent review is worthwhile.
- Management wishes to reclassify assets whilst the Asset Preservation Multiplier is deteriorating. The reclassification warrants an independent audit.
- A change in top management is imminent. An independent audit provides the new management with a transparent starting point.
Behind all three situations lies the same question: Does the supervisory board govern or merely report?
Conclusion: Steering rather than reporting
What happens if the Supervisory Board confines itself to mere reporting? Only then does the weakening of the earnings base become apparent in the financial figures, once the return on invested capital has fallen below the cost of capital. The company is then left with defensive measures: cutting costs, selling assets, cancelling investments. If, on the other hand, the Supervisory Board actively steers the company, it recognises the direction much earlier and can reallocate capital whilst the company is still operating from a position of strength. And it can link the Executive Board’s remuneration to what will secure the company’s future profitability.
