Joe said, “Current Liabilities are due within twelve months. A company can’t really borrow money for, say, six months and use it to generate more cash. Instead, it will borrow for a few years and use those borrowings to acquire assets to generate more cash.”

If a company “can’t borrow money for 6 months and earn a return on it”, then shouldn’t the company be ‘penalized’ for that decision in the ratio calculation (thereby increasing the denominator and decreasing the return %)?

For example, a company has massive overhead – say, Marketing projects that are worthless – (most of it un-needed…), and they are short-term payables, so it shows up in Current Liabilities. Shouldn’t we put that into our calculation so the company’s CROIC is penalized for management’s decision to pay for these Marketing projects (or insert anything here that would be detrimental to the business)? Or to expand further, shouldn’t the company be expected to earn a return off of ALL their liabilities (payroll, leases, debt, accrued expenses, etc.)? That’s what a business is for, right… to put money into and get more out.

Also, I tend to agree with Joe when he says to include the Goodwill and/or Intangibles in the denominator, because if a company buys Company B for $500 million over its net assets, it is recorded as Goodwill, and management better expect to earn a return of off that investment. Same thing for Intangibles. If management decides to include Intangibles on the balance sheet, they better expect to earn a return off that as well.

So, we are effectively putting management “on the chopping block” for its decisions. If the CROIC is still good, then good… if the CROIC suffers, then move on.

So, I guess I’m proposing that a new/better calculation should be CRTA (Cash Return on Total Assets) = FCF/Total Assets. So, we are including ALL debt (short- and long-term), ALL liabilities (because management is expected to earn a return off of all short- and long-term liabilities), and ALL SH Equity (this part is obvious).

Make sense?

With this definition of CROIC – the only difference vs ROIC is the numerator. The article’s just going a step further with EBIT * (1-t) by taking out reinvestment needs and come up with FCF – which a good measure in its on rights . but still doesnt solve the problem that ROIC uses book value

Market price of the stock will not effect SE after the company initially goes public, unless they have follow-up equity offerings. SE is effected by earnings retained, dividends paid, treasury stock bought/sold, etc.

I’m still learning, so bear with me.

I’m having a couple of problems with the model and I would really like if someone could take 5 minutes and explain them to me. First of all – shareholder’s Equity.

From what I understand once a company issues shares for the first time, the amount of money they get (thus invested in the company) is the issuing price multiplied by the amount of shares issued. But the price changes over time (obviously), so when placing the current Shareholder’s Equity in the formula, am I not taking a number that doesn’t really represent the invested capital in the company?

I know that the SE figure is the relatively small figure in the denominator, but still.

Cheers everyone,

and happy Hanukkah-Christmas-New-year’s =)

Have you looked at any singapore company in your analysis ?

Is it because the accounting standards are different ?

Regards

What about intangibles like goodwill? If a brand is vital to maintaining business operations, shouldn’t the price paid to acquire or to build that brand be factored into the required investment capital each year? I mean, after all, take certain brands away from company and you will effect its operations. And like you said we’re trying to figure out how much capital any given company requires to maintain status quo.

Hoping you’ll shed some more light on the subject for me and many others.

Thanks!

Thanks

Great Site.