Hi dan shuart .....I am new to investing and i could not understand how to calculate reinvestment rate and incremental roic ...if if could share example of any calculation if would of great benefit for beginners like us ...thank you so much
I-ROIC: (change in operating cash flow) / (reinvested cash)
So, if a company generates $5B of operating cash flow over ten years and retains $2.5B of cash, the reinvestment rate is 50% ($2.5B/$5B). If operating cash flow grew by $500M over that time period, I-ROIC is 20% ($500M/$2.5B).
I enjoyed your post and the logic behind it resonates with me. I'd really appreciate it if you have a moment to add additional clarity to some of your calculations.
1. What is the average yield calculation numerator and denominator?
2. The compounding column is simply the reinvestment rate times the I-ROIC?
I do have one additional question regarding how valuation comes into play when detecting value traps in this way, but I'm thinking its in the average yield so, ill hold off on that question.
That's probably correct going forward, expectations may now be low enough for a few of the former value traps to outperform over the next 5-10 years, and ODFL has already experienced the tailwind of an expanding multiple.
This is great, thank you for this insight into your investing assessment shorthand
Hi dan shuart .....I am new to investing and i could not understand how to calculate reinvestment rate and incremental roic ...if if could share example of any calculation if would of great benefit for beginners like us ...thank you so much
Sri - good question. For all of the numbers below we generally work off of 5 or 10 year periods. Here's a quick summary of the framework:
Reinvestment rate: (reinvested cash / operating cash flow). Reinvested Cash = (OCF + debt issued + stock issued - debt repaid - stock repurchased - dividends paid)
I-ROIC: (change in operating cash flow) / (reinvested cash)
So, if a company generates $5B of operating cash flow over ten years and retains $2.5B of cash, the reinvestment rate is 50% ($2.5B/$5B). If operating cash flow grew by $500M over that time period, I-ROIC is 20% ($500M/$2.5B).
Hopefully that's helpful.
Dan
Hi Dan,
I enjoyed your post and the logic behind it resonates with me. I'd really appreciate it if you have a moment to add additional clarity to some of your calculations.
1. What is the average yield calculation numerator and denominator?
2. The compounding column is simply the reinvestment rate times the I-ROIC?
I do have one additional question regarding how valuation comes into play when detecting value traps in this way, but I'm thinking its in the average yield so, ill hold off on that question.
Thanks for the post,
Eve
Thank you so much .... extremely delighted
ODFL is certainly a great business but I think I'll take Verizon at less than 4x free cash over ODFL at 30x free cash.
That's probably correct going forward, expectations may now be low enough for a few of the former value traps to outperform over the next 5-10 years, and ODFL has already experienced the tailwind of an expanding multiple.
thanks for sharing the framework, tangible way to evaluate companies!