## Invested Capital Turns

Metrics are only as good as the data that drive them. The best fundamental data in the world drives our metrics. Here’s proof from some of the most respected public & private institutions in the world.

Invested capital turns are an important consideration in the analysis of return on invested capital (ROIC). This metric measures a company’s operating revenues relative to its average invested capital. It is the multiplier through which a company’s NOPAT margin (or core operational efficiency) is translated into its ROIC, which also accounts for the cost of the balance sheet. In other words, it is a key measure of balance sheet efficiency.

We’ve previously demonstrated that ROIC is the primary driver of stock prices. Invested capital turns can also provide insights into the capital intensiveness of a business and whether it has deployed capital prudently over time. Since the market assigns value to companies that produce the most cash per capital invested, knowing which companies have deployed invested capital most efficiently is an important factor in the investment decision-making process.

The formula (see Figure 1) for calculating invested capital turns is straightforward. The hard part is finding all the data, especially from the footnotes and MD&A, required to get invested capital right. When we calculate invested capital turns, we make numerous adjustments to close accounting loopholes and ensure apples-to-apples comparability across thousands of companies.

### Figure 1: How to Calculate Invested Capital Turns

(Operating Revenue t) / ((Invested Capital t + Invested Capital t-1)/2)

Sources: New Constructs, LLC and company filings

Figure 2 below shows why invested capital turns matter. The higher a company’s ratio of invested capital turns, the lower the required NOPAT margin to earn an adequate ROIC. Conversely, the lower a company’s ratio of invested capital turns, the higher the required NOPAT margin to earn an adequate ROIC. General takeaways from this relationship include: 1) naturally lower-margin businesses need to be capital efficient; 2) naturally more capital-intensive businesses need to be margin efficient; and 3) high-margin, capital-light business models are capable of generating exceptionally high ROICs.

### Figure 2: Why Invested Capital Turns Matter

ROIC t = (Invested Capital Turns t) * (NOPAT Margin t)

Sources: New Constructs, LLC and company filings

Figure 3 shows the companies with the highest and lowest invested capital turns within our U.S. 500 coverage.

### Figure 3: Companies with Highest/Lowest Invested Capital Turns as of October 11, 2017

AmerisourceBergen Corp’s (ABC) invested capital turns of 16.0 is the highest of all U.S. 500 companies under coverage. This ratio of invested capital turns means ABC’s revenue base is 16x larger than its invested capital base. It also means ABC earns a top-quintile 16% ROIC on a NOPAT margin of just 1%. See a historical view of ABC’s invested capital turns here.

Apple (AAPL), Costco (COST), Fluor (FLR) and C.H. Robinson Worldwide (CHRW) have the second through fifth highest ratio of invested capital turns. A high ratio of invested capital turns alone doesn’t make for a good investment. However, it is telling that there are three Attractive-or-better rated stocks among the five companies with the highest invested capital turns and none among the companies with the lowest invested capital turns.

VeriSign’s (VRSN) invested capital turns of 0.1 is the lowest among all U.S. 500 companies under coverage. This ratio of invested capital turns means VRSN’s revenue base is 1/10 the size of its invested capital base. It also means that VRSN earn a bottom-quintile 3% ROIC despite a NOPAT margin of 46%. See a historical view of VRSN’s invested capital turns here and invested capital adjustments here.

Prologis (PLD), Realty Income (O), SL Green Realty (SLG), and Regency Centers (REG) have the second through fifth lowest ratio of invested capital turns. Notably, all four of these companies are REITs, which reflects the heavy capital investment involved in the acquisition and management of numerous real estate properties.

We make it easy for the average investor to leverage the benefits of a high quality ROIC model. Our models and calculations are 100% transparent because we want our clients to know how much work we do to ensure we give them the best earnings quality and valuation models in the business. As our research continues to proliferate, it gets harder for investors and executives to overlook its merits.

This paper compares our analysis on a mega cap company to other major providers.

Metrics are only as good as the data that drive them. The best fundamental data in the world drives our metrics. Here’s proof from some of the most respected public & private institutions in the world.

Our company models provide two versions of Fixed Income metrics:

(1) Traditional metrics use unscrubbed accounting data from the firm’s reported financials.

(2) Adjusted metrics use our scrubbed data, which adjusts for 30+ accounting loopholes.

See below for the Fixed Income metrics available in our models and their calculations.

1. Debt net of Cash – a liquidity ratio calculated by taking a company’s debt minus its cash.
2. Interest Coverage Ratio – a profitability ratio that shows how easily a company can pay their interest.
3. Debt to Equity Ratio – a financial leverage ratio that shows how much of a company is funded in debt versus equity.
4. Debt to Capital Ratio – a financial leverage ratio that shows how much of a company's capital is funded by debt.
5. Debt net of Cash per EBITDA – a leverage ratio that shows how many years it would take a company to pay back its debt if net debt and EBITDA are constant.
6. Debt net of Cash Per FCF –a coverage ratio that shows how much debt a company has per free cash flow.
7. Current Ratio – a liquidity ratio that measures a company's ability to pay short-term obligations.
8. Quick Ratio –a liquidity ratio that measures a company's ability to pay short-term obligations with its most liquid assets.
9. Debt Service Coverage Ratio –a measure of cash flow available to pay current debt obligations.
10. Asset Turnover Ratio – an efficiency ratio that measures how much revenue a company generates from its assets.
11. Fixed Asset Turnover Ratio – an efficiency ratio that measures how much revenue a company generates from its fixed assets.
12. Equity Multiplier – a leverage ratio that shows how much of a company's assets are financed by equity.
13. Tangible Net Worth – The value of a firm's tangible assets.
14. Debt per Tangible Net Worth – a leverage ratio that shows how much a company's tangible assets are financed by debt.
15. Basic EPS Growth per EBIT Growth – a ratio that shows that how much earnings per share changes per change in earnings before interest & tax.
16. FFO per Total Debt – a leverage ratio for REITs that shows how much free cash flow is available to cover debt obligations.
17. FFO per Total Interest Expense – a liquidity ratio for REITs that shows how much free cash flow is available to cover interest expense.
18. Asset Coverage Ratio – a solvency ratio that measures how well a company can repay its debt by selling its tangible assets.
19. Cash Ratio – a liquidity ratio that measures a company's ability to pay short term obligations with its cash.

See Figure 1 for the formula behind each of these metrics.

Figure 1: Traditional Fixed Income Metric Calculations

Sources: New Constructs, LLC

1. Debt net of Cash – a liquidity ratio that takes the fair value of a company's debt plus the present value of its operating leases minus its excess cash.
2. Interest Coverage Ratio – a profitability ratio that shows how easily a company can pay their non-operating interest.
3. Debt to Equity Ratio – a financial leverage ratio that shows how much of a company is funded in debt versus equity. The adjusted version accounts for all debt, including hidden debt such as operating and finance leases.
4. Debt to Capital Ratio – a financial leverage ratio that includes all debt that a company has, including hidden debt.
5. Debt net of Cash per EBITDA – a leverage ratio that shows how long it would take a company to pay back its debt if net debt and EBITDA are kept constant.
6. Debt net of Cash per FCF – a coverage ratio that shows how much debt a company has per the free cash flow it generates.
7. Current Ratio – a liquidity ratio that measure's a company's ability to pay back its short-term obligations. Adjusted current assets includes all reserves and required cash.
8. Quick Ratio – a liquidity ratio that measures a company's ability to pay short-term obligations with its most liquid assets. Adjusted current assets includes all reserves and required cash.
9. Debt Service Coverage Ratio – a coverage ratio that shows how easily a company can pay its debt obligations.
10. Asset Turnover Ratio – an efficiency ratio that measures how much revenue a company generates from its assets (a 2-year average).
11. Fixed Asset Turnover Ratio – an efficiency ratio that measures how much revenue a company generates from its fixed assets (a 2-year average).
12. Equity Multiplier – a leverage ratio that shows how much of a company's assets are financed by equity.
13. Tangible Net Worth - The value of a firm's tangible assets.
14. Debt per Tangible Net Worth – a leverage ratio that measures how much debt was used to finance a company's tangible assets.
15. Basic EPS Growth per EBIT Growth – a ratio that shows how much EPS is affected by change in EBIT.
16. FFO per Total Debt – a liquidity ratio for REITs that measures how much free cash flow (FFO) is available to cover its debt obligations.
17. Asset Coverage Ratio – a solvency ratio that measures how well a company could repay its debt by selling its assets in a liquidation.

See Figure 2 for the formula behind each of these metrics.

Figure 2: Adjusted Fixed Income Metric Calculations

Sources: New Constructs, LLC