An investment centre is an organisational unit whose manager is responsible for revenue, costs, and the investment of capital. Performance is measured not just by profit but by the return generated on the capital deployed, typically using return on invested capital (ROIC) or residual income. It represents the highest level of divisional accountability.
In Depth
Investment centres extend the profit centre concept by adding capital efficiency to the performance equation. A profit centre that generates £5M profit might seem impressive until you learn it required £100M of capital (5% return), while another profit centre earning £2M on £10M of capital (20% return) is far more efficient.
Performance metrics for investment centres include Return on Invested Capital (ROIC), Return on Assets (ROA), Economic Value Added (EVA), and Residual Income (profit minus a charge for capital employed). These metrics ensure that managers consider the cost of the capital they use.
FP&A teams support investment centres by tracking the capital employed by each division, calculating return metrics, evaluating capital allocation requests, and benchmarking divisional returns against each other and against external alternatives.
The investment centre approach is most common in large, diversified companies where different divisions have very different capital requirements. A real estate division, a technology division, and a services division each need different levels of capital, and simple profit comparison would be misleading.
For UK groups, investment centre analysis supports capital allocation across subsidiaries, informs M&A decisions (should the group invest in a new acquisition or return capital to shareholders?), and helps evaluate whether each division is earning above the group's cost of capital.
Real-World Example
A UK conglomerate evaluates its three investment centres. Manufacturing: £8M profit on £40M capital (20% ROIC). Distribution: £3M profit on £25M capital (12% ROIC). Property: £4M profit on £60M capital (6.7% ROIC). With a group WACC of 10%, Manufacturing creates significant value, Distribution is marginal, and Property destroys value. The FP&A team recommends divesting the property portfolio and reallocating capital to Manufacturing.
Related Terms
Return on equity (ROE) measures a company's profitability relative to shareholders' equity, showing ...
Return on assets (ROA) measures how efficiently a company uses its total assets to generate profit. ...
Return on investment (ROI) measures the gain or loss generated by an investment relative to its cost...
A cost centre is an organisational unit or function that incurs costs but does not directly generate...
A profit centre is an organisational unit that is responsible for both generating revenue and managi...
Stop wrestling with spreadsheets. Grove FP gives your finance team a purpose-built platform for budgeting, forecasting, and financial modelling — designed for UK businesses.
FAQ