The board sees declining revenue. The PE sponsor sees missed EBITDA targets. The instinct is to cut costs, restructure the org chart, and replace the CEO.
Sometimes that works. Often it doesn’t — because the real problem isn’t in the P&L. It’s in the balance sheet.
The symptoms look like a revenue problem
A company can have reasonable margins and still be destroying value. The symptoms show up as cash pressure, missed covenants, or declining competitiveness — but the root cause is capital misallocation.
Working capital growing faster than sales. Inventory that hasn’t moved in 180+ days. Capex approved without a return threshold. Customer concentration masking structural fragility.
These don’t show up in the monthly EBITDA report. But they all show up in one number: ROIC.
Why ROIC matters more than EBITDA in a turnaround
When ROIC falls below the cost of capital, every dollar reinvested in the business generates less return than it costs. The company isn’t just underperforming — it’s mathematically destroying value.
EBITDA tells you whether the operation is profitable before financing costs. It’s useful, but incomplete. It doesn’t tell you how much capital is required to generate those profits, whether that capital is deployed efficiently, or whether the company would be better off returning capital to shareholders than reinvesting it.
ROIC answers the question EBITDA avoids: for every dollar of capital invested in this business, how much return does it generate? And is that return higher or lower than the cost of that capital?
In a turnaround context, that distinction is critical. Cutting costs to improve EBITDA without addressing capital efficiency is like treating a fever without diagnosing the infection. The numbers may improve temporarily, but the underlying problem persists.
The turnaround sequence that works
Step 1 — Calculate the real ROIC
Not the adjusted EBITDA the bank sees. The actual return on every dollar of invested capital.
ROIC = NOPAT / Invested Capital
Where NOPAT is net operating profit after tax, and invested capital is working capital plus net fixed assets — excluding cash, non-operating assets, and accounts payable.
This is the honest number. In distressed companies, it’s almost always worse than anyone expected — because the monthly reports were tracking EBITDA, not capital efficiency.
Step 2 — Decompose it
ROIC decomposes into two independent levers:
ROIC = Operating margin × Capital turnover
Lever A — Operating margin. Is the problem in pricing, costs, or product mix? If operating margin is compressing while revenue grows, the issue is usually portfolio complexity: too many SKUs, too many customer-specific terms, too much overhead that scaled with revenue instead of being absorbed by it.
Lever B — Capital turnover. Is too much capital trapped in the operation? If capital turnover is declining, the issue is usually working capital: excess inventory, slow-paying customers, or fixed assets that aren’t generating proportional revenue.
The answer determines the entire turnaround strategy. A margin problem and a capital problem look similar in the EBITDA report — but the solutions are completely different.
Step 3 — Quantify the gap
What is the ROIC today vs. what it could be if the top 3-5 levers are executed? That gap, expressed in dollars, is the turnaround business case.
This isn’t a theoretical exercise. It’s a DuPont decomposition applied to real financial statements, benchmarked against sector performance, with each lever quantified independently.
The output is a value bridge: current ROIC on one end, potential ROIC on the other, and the specific initiatives that close the gap — each with a dollar value and an execution timeline.
Step 4 — Execute in waves
Not everything can be fixed at once. The execution sequence matters:
Wave 1 (0-90 days) — Quick wins. Working capital optimization, overhead audit, capex freeze on uncommitted projects, monthly ROIC dashboard. These generate immediate cash impact and buy time for structural changes.
Wave 2 (90-365 days) — Structural changes. Cost structure redesign, inventory liquidation programs, new capex approval processes with ROIC hurdle rates, customer portfolio rationalization. These require organizational commitment but deliver sustainable margin and capital improvement.
Wave 3 (12-18 months) — Capability building. Internal ROIC monitoring capabilities, capital allocation discipline embedded in planning processes, performance management aligned to capital efficiency metrics. These ensure the improvements persist after the turnaround team exits.
The operating partner’s role
The best operating partners don’t start with cost cuts. They start with a capital diagnosis.
An operating partner who walks into a distressed portfolio company and immediately starts cutting headcount or renegotiating contracts is treating symptoms. One who first calculates the real ROIC, decomposes it into margin and turnover, and quantifies where capital is trapped — that one can build a turnaround plan that addresses root causes.
The difference shows up in outcomes: companies that undergo ROIC-driven turnarounds don’t just survive the crisis — they often emerge with stronger capital discipline than they had before the distress began.
The question that changes everything
Most turnaround conversations start with “how do we improve EBITDA?” That’s the wrong question.
The right question is: where is capital trapped, and what return is it actually generating?
Start there. The turnaround plan writes itself.
At Sintelo, we calculate the real ROIC, decompose it into its levers, and quantify the gap between current and potential performance — in dollars. The diagnostic takes 2-6 weeks at fixed fee.