Term
| Growth and ROIC Drive Value |
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Definition
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Term
| Relationship between Growth, ROIC and cash flow |
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Definition
| Growth = ROIC x Investment Rate |
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Term
| Cash Flow Calculation from Earnings & Investment rate |
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Definition
| Cash Flow = Earnings x (1-Investment Rate) |
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Term
| Investment Rate Calculation |
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Definition
| Investment Rate = Growth/ROIC |
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Term
| Detailed Cash Flow Calculation |
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Definition
| Cash Flow = Earnings x (1-Growth/ROIC) |
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Term
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Definition
Economic Profit = Invested Capital x (ROIC - Cost of Capital)
Economic profit is the spread between the return on invested capital and the cost of capital multiplied by the amount of invested capital.
Economic profit encourages a company to undertake investments that earn more than their cost of capital, even if their return is lower then current average return. |
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Term
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Definition
General Lesson
High ROIC companies should focus on growth
Low ROIC companies should focus on improving returns before growing
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Term
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Definition
Net operating profit less adjusted taxes (NOPLAT): represents the profits generated from the Company's core operations after subtracting the income taxes related to core operations
Invested Capital represents the cumulative amount the business has invested in its core operations - primarily PP&E and working capital. |
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Term
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Definition
| Net Investment is the increase in invest capital from one year to the next |
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Term
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Definition
FCF is the cash flow generated by core operations after deducting investments in new capital.
FCF = NOPLAT - Net Investment |
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Term
| Return on Invested Capital (ROIC) |
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Definition
ROIC return a company earns on each dollar invested in the business
ROIC = NOPLAT / Invested Capital |
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Term
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Definition
IR is the portion of NOPLAT invested back in the business
IR = Net Investment/NOPLAT |
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Term
| Value Calculation using perpetuity growth rate. |
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Definition
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Term
| FCF in terms of NOPLAT and IR |
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Definition
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Term
| Growth Rate Calculation (g) |
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Definition
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Term
| IR in terms of g and ROIC |
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Definition
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Term
| FCF with detailed IR equation |
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Definition
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Term
Full Value Calculation (perpetuity)
Drawback? |
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Definition
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In practice formula is restrictive as it assumes a constant ROIC and g going forward. |
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Term
| Earning's Multiple Detailed |
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Definition
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Earning's multiple is driven by both its expected growth rate and its return on invested capital |
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