Thanks to these innovative investments 3M Co (NYSE:MMM) has some of the highest gross margins in the industrial sector. 3M has the 12th highest gross margin, at 48.7%, out of all North American industrial companies. 3M’s strategic focus on innovation has led to a decrease in the amount of PPE it carries on its balance sheet. In 1980, 33.3% of its asset base was PPE. This ratio has fallen all to the way to 20.4%. And as 3M moved to a more tangible-light asset mix, its gross margins have increased from 44% to nearly 49%.
In addition to fatter margins we can see that intangible investments have also helped to increase 3M Co (NYSE:MMM)’s profitability and cash flow generation. Return on invested capital has increased from 19.8% in 1980 to 26.2% currently. 3M’s free cash flow margin has increased from a paltry 1.93% to a healthy 28.2%. And its operating cash flow margin has increased from 10.6% to 33%.
The academic research is clear that companies that invest more than their industry peers in intangible investments tend to experience excess stock market returns as intangible investments are overlooked by the general financial community. It is not the fault of investors, however, that these investments are overlooked. The forced expensing of intangible investments due to current accounting rules creates an informational gap between companies and investors about what the true asset base a company is using in order to create future profits. This informational gap is what ultimately leads to persistence outperformance such as the fact that Knowledge Leaders have outperformed the market for 8 consecutive years.