396  Valuation by Parts
were largest in the private-label and branded-products businesses, and low-
est in organic products. In the typical annual budgeting process, many com-
panies routinely allocate their capital, research and development (R&D), and 
marketing budgets to the same activities year after year, regardless of their 
relative contribution to value creation. The cost is high, since companies that 
more actively reallocate resources generate, on average, 30 percent higher 
total shareholder returns (TSR).1 A valuation by parts can highlight whether a 
company’s capital spending is aligned with its value-creation opportunities.
Sometimes securing the best insights requires even more finely grained 
valuations than the ConsumerCo example provides. When we analyzed four 
divisions within a consumer-durable-goods company, we found that all were 
generating fairly similar returns, between 12 and 18 percent, well above the 
company’s 9 percent cost of capital (see Exhibit 19.5). But at the next level, 
business units, returns were much more widely distributed. Even in the com-
pany’s highest-performing division, a business unit was earning returns below 
its cost of capital. At the level of individual activities within business units, the 
return distribution was even larger. Differentiating where to invest in growth 
and where to improve margins at such granular levels can trigger significant 
improvements in value creation for the company as a whole.2
Building Business Unit Financial Statements
To value a company’s individual business units, you need income state-
ments, balance sheets, and cash flow statements. Ideally, these financial state-
ments should approximate what the business units would look like if they 
1 S. Hall, D. Lovallo, and R. Musters, “How to Put Your Money Where Your Strategy Is,” McKinsey 
Quarterly (March 2012).
EXHIBIT 19.4  ConsumerCo: Historical Investments, 2015–2020
Cumulative net 
investments,1 
$ million
Cumulative revenues, 
$ million
Average ROIC, 
%
Revenue growth, 
CAGR, %
Organic products
  205
  3,620
  27.4
  9.6
Devices
  214
  6,343
  16.3
  7.1
Private Label
  240
  8,070
  9.0
  4.2
Branded products
  334
  11,373
  20.1
  1.8
1 Capital expenditures plus investments in net working capital minus depreciation.
2 M. Goedhart, S. Smit, and A. Veldhuijzen, “Unearthing the Source of Value Hiding in Your ­Corporate 
Portfolio,” McKinsey on Finance (Fall 2013).

Building Business Unit Financial Statements  397
were stand-alone companies. Creating financial statements for business units 
­requires consideration of several issues:
• Allocating corporate overhead costs
• Dealing with intercompany transactions
• Understanding financial subsidiaries
• Navigating incomplete public information
We will illustrate each of these issues by extending the ConsumerCo 
example.
Allocating Corporate Overhead Costs
Most multibusiness companies have shared services and corporate overhead, 
so you need to decide which costs should be allocated to the businesses and 
which retained at the corporate level. For services that the corporate center 
provides, such as payroll, human resources, and accounting, allocate the costs 
by cost drivers. For example, the aggregate cost of human resources services 
provided by the corporate parent can be allocated by the number of employ-
ees in each business unit.
When costs are incurred only because the units are part of a larger com-
pany (for example, the CEO’s compensation or the corporate art collection), 
EXHIBIT 19.5  Breakdown of Return on Invested Capital at Each Level of Analysis
Frequency distribution of ROICs, %
Company
At company or 
divisional level, ROIC is 
similar at around 
10%–20%
Divisions 
(4 units)
Business 
units 
(25 units)
A more detailed 
breakdown reveals big 
differences in ROIC by 
unit and segment
Business 
segments 
(75 units)
<–10
–10
–5
0
5
10
15
20
25
>35