Did Ronchi create value?Earnings is a powerful indication of DVL’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Ronchi’s performance in the past year. Recently, DVL produced negative earnings of -AU$4.59M , which is a further decline from prior year’s loss of -AU$3.39M. Moreover, on average, DVL has been loss-making in the past, with a 5-year average EPS of -AU$0.093. During times of negative earnings, the company may be incurring a period of reinvestment and growth, or it can be a sign of some headwind. In any case, CEO compensation should echo the current condition of the business. From the latest report, Ronchi’s total remuneration rose by 46.48% to AU$367.02K.
What’s a reasonable CEO compensation?
Even though there is no cookie-cutter approach, as compensation should account for specific factors of the company and market, we can evaluate a high-level thresold to see if DVL deviates substantially from its peers. This outcome can help shareholders ask the right question about Ronchi’s incentive alignment. On average, an Australian small-cap is worth around $140M, produces earnings of $10M, and pays its CEO at roughly $500,000 per year. Normally I would look at market cap and earnings as a proxy for performance, however, DVL’s negative earnings lower the usefulness of my formula. Analyzing the range of remuneration for small-cap executives, it seems like Ronchi is remunerated sensibly relative to peers. Putting everything together, though DVL is loss-making, it seems like the CEO’s pay is fair.
Board members are the voice of shareholders. Although CEO pay doesn’t necessarily make a big dent in your investment thesis in DVL, proper governance on behalf of your investment should be a key concern. These decisions made by top management and directors flow down into financials which impact returns to investors. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Governance: To find out more about DVL’s governance, look through our infographic report of the company’s board and management.
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of DVL? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!