Too Much Goodwill: A Red Flag For Your Portfolio

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Analysts and investors tend to spend very little time on Goodwill when looking at financial statements. In reality, Goodwill is an important number to keep an eye on. Since it reflects the money paid for acquisitions above the market value of the acquired company, it can signal overpayment, reckless spending, and the potential for damaging write-downs in the near future.

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David Trainer Explains Why You Need to Know a Company’s Invested Capital

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Watch David Trainer explain the importance of understanding how much capital has truly gone into a business, and the adjustments we make to calculate this metric.

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How to Value a Stock, Step 2: Invested Capital

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The second step to gauge the value of a company is to determine the sum of all cash that has been invested in a company over its life without regard to financing form or accounting name. We call this Invested Capital.

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30+ Accounting Adjustments to Get the Truth About Earnings & Valuation

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Reported earnings don’t tell the whole story of a company’s profits. They are frequently manipulated by companies to manage earnings.

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GAAP Opinion versus Economic Fact

GAAP financial statements generally fail to meet equity investors’ analytical needs. We try to calculate something that does.

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Discussing FASB’s Lease Proposal

On August 27th, I met with my fellow members of the FASB’s Investor Advisory Committee (IAC) to discuss the proposed treatment of operating leases on the balance sheet by the Financial Accounting Standards Board (FASB).

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Midyear Acquisitions – Invested Capital Adjustment

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When a company makes an acquisition, the entire purchase price is added to the company’s balance sheet in the year of the acquisition along with any assumed debts or other long-term liabilities. However, the only income added to the income statement is that which occurs after the acquisition closes. In other words, the balance sheet is charged with the full price of the acquisition while the income statement only gets partially impacted.

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Overfunded Pension Plan Assets – Invested Capital Adjustment

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Overfunded pension assets are similar to excess cash, and should not be included in the calculation of return on invested capital (ROIC).

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Deferred Tax Assets and Liabilities – Invested Capital Adjustment

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DTAs artificially raise reported assets and do not help generate operating profit while DTLs are like a source of interest-free financing. We remove the impact of DTAs and DTLs from our calculation of invested capital to ensure the more accurate measure of a firm’s return on invested capital (ROIC).

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Deferred Compensation Assets – Invested Capital Adjustment

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Deferred compensation plans delay employee compensation until a later date. The assets held for these plans are used to compensate employees in the future, not to generate profits for the company. As such, they should not be factored into the calculation of a company’s return on invested capital (ROIC).

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FASB/IASB Considers Adopting Revised Rules for Operating Lease Accounting

We applaud the Financial Accounting Standards Board’s (FASB) latest proposal to change the way leases are reported. The new rules would make only the shortest-term operating leases exempt from being recorded on the balance sheet.

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Accumulated Other Comprehensive Income Removed from Invested Capital – NOPAT Adjustment

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Reported assets don’t tell the whole story of the capital invested in a business. Accounting rules provide numerous loopholes that companies can exploit to hide balance sheet issues and obscure the true amount of capital invested in a business.

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Discontinued Operations Removed from Invested Capital – Invested Capital Adjustment

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Most investors would never know that discontinued operations distort GAAP numbers by over-stating assets on balance sheets and distorting the picture of a company’s ability to generate a return on that capital.

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Off-Balance Sheet Debt – Invested Capital Adjustment

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Investors who ignore off-balance sheet debt are not holding companies accountable for all of the capital invested in their business. By adding back off-balance sheet debt to invested capital, one can get a true picture of the value that management is creating for shareholders. Diligence pays.

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Off-Balance Sheet Reserves – Invested Capital Adjustment

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Reported assets don’t tell the whole story of the capital invested in a business. Accounting rules provide numerous loopholes that companies can exploit to hide issues and obscure the true amount of capital invested in a business over its life.

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Footnotes Adjustments for Earnings & Valuation Diligence

This article details the uniquely rigorous diligence behind each of our ratings on 3000 stocks, 7000 mutual funds and 400 ETFs. It contains reports on all the adjustments we make to convert GAAP data to economic earnings and derive true shareholder value in a discounted cash flow model.

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Footnotes Adjustments for Earnings & Valuation Diligence

This report summarizes our series of reports on how to convert GAAP data to economic earnings and derive true shareholder value in a discounted cash flow model as well as more accurate measures of economic book value, and enterprise value. As a former accountant and member of FASB’s Investor Advisory Committee, I know first hand that reported earnings don’t tell the whole…

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Invested Capital: Definition And Formulae

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Invested capital equals the sum of all cash that has been invested in a company over its life without regard to financing form or accounting name.

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ROIC: Definition And Formulae for Return on Invested Capital

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ROIC is the true measure of a company’s cash on cash returns.

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New Constructs’ Offerings: Company valuation models

Our Company Valuation models are very sophisticated discounted cash flow and earnings quality models.
An enormous amount of works goes into every model. I wish I could offer a short-cut (beyond our ratings and reports) for understanding our models.

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