Does anybody know how to implement this measure ?
More details in:
https://www.sec.gov/Archives/edgar/data/63908/000119312505042609/dex99.htm
Here’s a try.
The numerator would be (opincbdepra - opincbdepr(1,ann)). The number that P123 gives for MCD in 2004 isn’t exactly the same as the one on the web page, though. It’s pretty close. I have no idea what the deduction for currency conversion is all about, but it’s definitely not in the P123 database.
The denominator is complicated to compute because of the weighting, but the basic is avg(-cashfrinvesta, -cashfrinvest(1,ann)). You could easily create a custom formula using cashfrinvest(0,qtr) through (7,qtr) to get the weighting. P123’s data matches precisely the figure given on the web page. Make sure to use the minus sign. I haven’t adjusted for net cash (collection)/issuances of notes receivable because I don’t believe that number is in the database.
The number I get in early 2005 is 47% rather than 41%, unfortunately, because I didn’t subtract the effect of currency translation, which was huge.
To get a good historical sense of incremental ROIC, you first have to answer some important questions
- What was spent?
- What was the growth and growth rate?
- What would have been the rate at which growth declined in the absence of any spending?
From there, you must then determine how many dollars it would have taken to replace one unit of decline. The resulting “capital intensity” is your incremental return on investment.
You will not find this in any finance textbook that I am aware of, but the Canadian oil and gas producers have been doing it this way for some time.
ROTA and ROIIC got my attention after I have watched this video:
https://www.youtube.com/watch?v=WXsRmMhmuNo
Brian Yacktman is the portfolio manager of YCG funds and Donald Yackman’s son.
Thanks for the help !
This (below) seems like a good, usable formula. It works pretty well in my universe. (I put the max(5,) in the denominator because a lot of companies have positive cash flow from investments, which can result in good numbers for companies with negative growth.) Thanks for bringing this up!
(opincbdeprttm - opincbdeprptm)/max(5,avg(-cashfrinvestttm, -cashfrinvestptm))
I’ve tried to implement the weighting but I’m stuck.
Thank you.
Yuval’s formula is good in many instances, except where he noted it is not good.
In order to assess the general case (including negative growth), one should also consider the rate at which revenues and/or profits would decline in the absence of spending. This is not as idiosyncratic as one might initially think; companies must disclose an estimate of asset usefulness in DD&A. Thus, the ratio of DD&A over Net Plant can give us some idea as to the “decline” rate of revenues/profits in the absence of spending.
Yuval, have you made any attempts to improve on this? Or have you seen any improvements?
No, I haven’t. I think this formula is still pretty much on-the-money. I haven’t used it lately, but I might try it again.