Hayden Capital - Calculating Incremental ROIC

Hayden Capital – Calculating Incremental ROIC's [Slides]

Slides from Hayden Capital from the Corner of Berkshire & Fairfax meetup, titled, “Calculating Incremental ROIC’s.”

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

We respect your email privacy

Why Should We Care About ROIC’s and Reinvestment Rates?

Hayden Capital - Calculating Incremental ROIC

"Investing is an Art, not a Science"

  1. Many of the examples given here are theoretical. Often you won’t have all the information necessary to do the calculations –especially not down to the $0.01.
  2. This is simply a framework to think about these issues. It’s your job as an investor to fill in as much of the gap as possible, to hopefully see the bigger picture.

Reinvestment Rate

Reinvestment Rate: How Much Is The Company Investing In Itself?

Reinvested Earnings = Sustainable Earnings Power –Reported Earnings

Reinvestment Rate = Reinvested Earnings / Sustainable Earnings Power

  • Sustainable Earnings Power is what the business would theoretically earn if it stopped growing.
  • There no set “formula” for calculating this. It’s going to be industry & business model dependent.
    • For example, a commodity business may structurally only earn it’s cost structure difference vs the next most efficient competitor.
    • Alternatively, a one-of-kind, mission-critical software provider (think Microsoft in 90’s) has enormous pricing power.
      • They could raise prices up to the point where new customers = lost customers.
      • For the last marginal customer in this scenario, the Price = Customer’s Marginal Utility

Hayden Capital - Calculating Incremental ROIC

  • The better the reinvestment opportunities, the higher the reinvestment rate should be.
    • If a company has unlimited opportunities to earn 50% returns, management better be plowing every cent back into the company, and reporting $0 EPS (assuming investments are expensed).
    • Note: Some companies have a high return project, but limited capacity.
      • A new factory may cost $5M, with 50% returns. But the business generates $20M a year… what do you do with the other 15M?
      • Assuming the other 75% is returned, that’s only 12.5% growth.
    • Lots of opportunities to deploy capital are just as important as the Return on Invested Capital.

Hayden Capital - Calculating Incremental ROIC

Incremental Return on Invested Capital

Start with a Framework / Thesis (i.e.. a blank sheet of paper)

  • Investing and “data-point” analysis is similar to coloring. You’re simply trying to fill in the dots (i.e. piece together knowledge) to see the end picture.
  • For example, you think it could be a “wolf” (it’s what the directions say), but you’re skeptical… There’s no way to find out, until you start coloring.
  • (“Wolf” in this case = an attractive business)

Hayden Capital - Calculating Incremental ROIC

Find Data-points that Confirm or Deny the Thesis (i.e. Fill In The Dots)

  • The picture’s starting to come together… there’s some sort of shape, but it’s still not clear.
  • Some dots are outside the framework, but the majority seem to fit the outline.
  • Why’s that look like a Giraffe though??

Hayden Capital - Calculating Incremental ROIC

See the full PDF below.


Saved Articles

The Life and Career of Charlie Munger

Charlie is more than just Warren Buffett’s friend and Berkshire Hathaway’s Vice Chairman – Buffett has actually credited him with redefining how he looks at investing. Now you can learn from Charlie firsthand via this incredible ebook and over a dozen other famous investor studies by signing up below:

  • Learn from the best and forever change your investing perspective
  • One incredible tidbit of knowledge after another in the page-turning masterpiece of a book
  • Discover the secrets to Charlie’s success and how to apply it to your investing
Never Miss A Story!
Subscribe to ValueWalk Newsletter. We respect your privacy.

Congrats! Are you a smart person?

We have an exclusive targeted for being a sophisticated and loyal reader.

Sign up for ValueWalkPremium today and get our exclusive content for 35% off.

Use coupon code vip19 or click on the button below

Limited time offer only ENDS 12/31/2019 or after next 25 subscribers take advantage whichever comes first – please do not share this discount with others