Lezioni, Advance Corporate Finance

ROIC

ROIC dipende da:

• Industry structure (competition, Porter’s model)
• Company strategy (business model, ...)
• Price premium
• Cost (sell at lower cost) and capital efficiency (produce more)

Growth

The value creations of revenue growth depend on how easily competitors can respond to a company’s growth strategy:

• In general, product innovation is the best strategy
• Attracting new customers
• Bolt-on acquisition
• Market share gain

Long-term revenue growth for large companies is almost exclusively driven by the growth of the markets they operate in and by acquisitions they undertake (and the markets the acquired companies operate in). Although gains in market share contribute to revenues in the short term, these are far less important for long-term growth. Sustaining high growth is no less a challenge than initiating it: most products have natural life cycles and the only way to achieve lasting high growth is to continue introducing new products at an increasing rate (just about impossible).

Framework for valuation

1. Analyze historical performance: Analyzing ROIC

• NOPLAT
• Invested capital

2. Forecast financials: Growth and ROIC

To compute a company’s value using enterprise DCF, future free cash flow is discounted by the weighted average cost of capital. Rather than forecast FCF directly, however, forecast the financials that drive free cash flow.

2. Forecast financials: Free cash flow

Free cash flow, which is driven by revenue growth and return on invested capital, provides the basis for enterprise DCF valuation. The computation of FCF should be consistent with that of ROIC. Free cash flow begins with NOPLAT, adds depreciation, and subtracts investments in invested capital.

3. Continuing value

To estimate a company’s value, we separate a company’s expected cash flow into two periods and define the company’s value as follows: formula. Although many continuing-value models exist, we prefer the key value driver model. The key value driver formula is superior to alternative methodologies because it is based on cash flow and links cash flow to growth and ROIC.

4. Weighted average cost of capital

When performing an enterprise DCF, make sure to choose the cash flows and discount factor consistently. Since free cash flows are the cash flows available to all investors, the discount factor for free cash flow must represent the risk faced by all investors. The weighted average cost of capital (WACC) blends the required rates of return for debt kd and equity ke based on their target market values.

5. Enterprise DCF valuation

Defining economic profit

Economic profit translates size, return on capital, and cost of capital into a single measure. Economic profit equals the spread between the return on invested capital and the cost of capital times the amount of invested capital:

Economic Profit = Invested Capital × (ROIC – WACC)

The formula for economic profit can be rearranged and defined as after-tax operating profits less a charge for the capital used by the company:

Economic Profit = NOPLAT − (Invested Capital × WACC)

This approach shows that economic profit is similar in concept to accounting net income, but it explicitly charges a company for all its capital, not just the interest on its debt.

Reorganized balance sheet

• Separate operating assets (like property, plant, and equipment [PP&E]) from non-operating assets (like equity investments), and separate operating liabilities (like accounts payable) from financial liabilities (like interest-bearing debt).
• NOPLAT includes only operating-based income. Unlike net income, interest expense and non-operating income are excluded from NOPLAT.

Analyze performance

• Analyze ROIC: with and without goodwill
• With: To measure aggregate value creation for the company’s shareholders
• Without: Measures the underlying operating performance of the company and its businesses and is used to compare performance against peers and to analyze trends
• Analyze revenue growth: Calculating revenue growth directly from the income statement will suffice for most companies. The year-to-year revenue growth numbers sometimes can be misleading, however.