We calculate invested capital in two mathematically equivalent ways: financing and operating approach. Figure 1 shows the basic calculations. On page 2, we share the complete calculations for specific companies.
Thesis: Management can boost the market value of American Express in the amounts below by aligning the firm’s strategy and performance compensation with real cash flows or what we call return on invested capital (ROIC).
It’s incredible that corporate executives and the market as a whole continue to depend on such flawed numbers when we already have a measure that is clearly linked with value creation: return on invested capital (ROIC).
In the search for safe investments in today’s volatile markets, investors should focus on companies that have a history of creating shareholder value, the ability to earn quality returns on capital, and an undervalued stock. This week’s Long Idea, Wells Fargo & Company (WFC) not only fits the description of a safe investment, but its shares are also greatly undervalued.
The Dow Jones Industrial Average has a deserved reputation of only housing the best-of-the-best blue chip stocks. Only the oldest, largest, and most profitable companies are included in the index, and these companies are, generally, some of the surest investments you can make. However, assuming that simply because a ticker is in the Dow that…
In this podcast, CEO David Trainer will explain why many of the big banks will not be as good investments now as they have been in the past.
David Trainer discusses why big banks are no longer an attractive investment.
Trading stocks sometimes feels like a very modern phenomenon, so it’s easy to forget that some of the companies we’re investing in go back a century or more.
As regulators dole out punishments that fit the crimes, they are finally closing many of the illegal trading loopholes that have driven so much of Wall Street profits over the past decade.
Companies with underfunded pensions will likely need to divert a greater amount of future cash flows away from shareholders to make up the funding gap. An accurate analysis of shareholder value should include the net funded status of pensions.
Overfunded pension assets are similar to excess cash, and should not be included in the calculation of return on invested capital (ROIC).
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.
Reported earnings don’t tell the whole story of a company’s profits. They are based on accounting rules designed for debt investors, not equity investors, and are manipulated by companies to manage earnings. Only economic earnings provide a complete and unadulterated measure of profitability.
Non-operating items in operating income are unusual gains that don’t appear on the income statement because they are bundled in other line items. Without careful footnotes research, investors would never know that these non-recurring income items distort GAAP numbers by artificially raising operating earnings.
Non-operating expenses are unusual charges that don’t appear on the income statement because they are bundled in other line items. Without careful footnotes research, investors would never know that these non-recurring expenses distort GAAP numbers by lowering operating earnings.
Finding the best ETFs is an increasingly difficult task as there are more and more to choose from every day.
Finding the best ETFs is an increasingly difficult task in a world where a new ETF seems to be born every 10 seconds.
The Financials sector ranks last out of the ten major sectors as detailed in our sector roadmap. It gets my Dangerous rating, which, like my fund ratings, is based on aggregation of stock ratings for each of 563 companies in the sector. The Financials sector is the bottom of the sector barrel.
For those investors interested in rigorous research, I offer my roadmap to the best stocks and funds in the market by sector. The full sector roadmap is here.
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