2012 from roe to cfroi® and - cfa switzerlandswiss.cfa/lists/events calendar/attachments/319/roe to...
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www.credit-suisse.com/holtmethodology Introducing HOLT®
HOLT
CONFIDENTIAL – For Education and Training Purposes Only
From ROE to CFROI® and
everything in between
CFA Institute
2012
Greg Collett CFA
+44 (0) 207 88 33 643
HOLT Custom Solutions
CLARITY IS CONFIDENCE HOLT
Agenda
Introduction
Accounting
Performance Measurement
Fade and Mean Reversion
Link to Valuation
Questions
CLARITY IS CONFIDENCE HOLT
Accounting – how it all flows around
CLARITY IS CONFIDENCE HOLT
The Ideal Performance Metric
Question Problem
Does the metric allow fair comparisons between old and new companies?
New assets = low return Old assets = high return
How do you compare a short life tech company to a longer life capital goods company?
Ratio vs IRR
Can you compare returns across countries with high and low inflation?
Income statement reflects inflation Balance sheet to a lesser extent
Do the return and growth measures track Total Shareholder Return (TSR) over time.
Does a rising return lead to greater TSR?
Is the return measure subject to accounting manipulation?
Financing manipulation does not always improve TSR
CLARITY IS CONFIDENCE HOLT
The Ideal Performance Metric
Question ROE ROIC CROGI CROIGI CFROI
Old Assets/New
Assets? ? ? ? ?
Asset Life ? ? ? ? ?
Inflation ? ? ? ? ?
Accounting
Distortions? ? ? ? ?
CLARITY IS CONFIDENCE HOLT
RONA
ROIIC
ROCE
ROIC
CROIGI
CROGI
CFROI
ROE
Return on
Invested Capital
Return on Equity
Cash Flow
Return on
Investment
Cash Return on
Gross
Investment
Cash Return on
Inflation
Adjusted Gross
Investment
Comparison of Financial Performance Metrics
CLARITY IS CONFIDENCE HOLT
Return on Equity
ROE is defined as Net Earnings / Book Equity.
It is an incomplete measure because it measures
the return on assets not funded by debt.
ROIC
CROIGI
CROGI
CFROI
ROE
Return on Equity
CLARITY IS CONFIDENCE HOLT
Return on Equity – Changing Leverage Adds Noise to the Signal
Income 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000
Costs 700 700 700 700 700 700 700 700 700 700 700
EBIT 300 300 300 300 300 300 300 300 300 300 300
Interest 100 90 80 70 60 50 40 30 20 10 0
PBT 200 210 220 230 240 250 260 270 280 290 300
Tax 60 63 66 69 72 75 78 81 84 87 90
Net Income 140 147 154 161 168 175 182 189 196 203 210
Debt 1000 900 800 700 600 500 400 300 200 100 0
Equity 0 100 200 300 400 500 600 700 800 900 1000
Deb/(Debt+Equity) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
ROE #N/A 147% 77% 54% 42% 35% 30% 27% 25% 23% 21%
0%
20%
40%
60%
80%
100%
120%
140%
160%
0
200
400
600
800
1,000
1,200
1 2 3 4 5 6 7 8 9 10 11
Debt Equity ROE
CLARITY IS CONFIDENCE HOLT
- Expenses
Revenue
Profit
Understanding Inflation’s Impact on ROE
ROE = Net Income
Owner’s Equity
Inventory
LIFO
FIFO
~
Depreciation ~ Wages
CLARITY IS CONFIDENCE HOLT Source: HOLT analysis
Inflation Can Seriously Distort ROE
0
5
10
15
20
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990
Reported ROE
using actual U.S.
inflation for a 6%
“real” IRR
project.
6% IRR Project
(Inflation Adjusted)
Reported
ROE
CLARITY IS CONFIDENCE HOLT
Return on Equity
Issue ROE Reason
Old Assets/New
AssetsNo
Neither net income nor equity
refect asset age
Asset Life NoNeither net income nor equity
refect asset life
Inflation NoNet income reflects inflation. Equity
is an historical value
Accounting
DistortionsNo
Both are subject to non-operating
distortions
TSR Tracking No Tracks poorly
CLARITY IS CONFIDENCE HOLT
RONA
ROIIC
ROCE
Return on Invested Capital
ROIC is defined as NOPAT / Invested Capital and is key to Economic Profit analysis.
ROIC
CROIGI
CROGI
CFROI
ROE
Return on
Invested Capital
CLARITY IS CONFIDENCE HOLT
Operating Profit (EBIT)
- Effective Tax Charge
= NOPAT (Net Operating Profit After Tax)
Total Assets
- Payables
- Other Current Liabilities
- Cash
= Invested Capital
Invested Capital
NOPAT ROIC =
Return on Invested Capital
CLARITY IS CONFIDENCE HOLT
Current Dollar income which includes noncash items such as depreciation
and amortisation
Historical cost depreciated assets
Excludes off balance sheet items
Can we expect this ratio to tell
us anything useful about
performance?
NOPAT and Invested Capital
are not in constant dollars!
Invested Capital
NOPAT ROIC =
Return on Invested Capital – Issues
CLARITY IS CONFIDENCE HOLT
Accounting Items Can Distort the Return Calculation
Example: Two Plants
• Managers A and B operate plants of equal capacity but with different ages
• Plants each have 20 year life, original cost of assets = 1,000
Manager B is
penalized for
having a newer
plant!
Plant A Plant B
NOPAT 100 100
Age of Assets 10 0
Invested Capital 500 1,000
ROIC 20% 10%
CLARITY IS CONFIDENCE HOLT
Worldwide Accounting and Reporting Issues Prevent Comparability
CLARITY IS CONFIDENCE HOLT
Return on Invested Capital
Issue ROIC Reason
Old Assets/New
AssetsNo Asset age reduces assets
Asset Life No Not taken into account
Inflation NoNOPAT is current dollars,
Invested Capital is not
Accounting Distortions MaybeDepends on analyst
adjustments (op leases)
CLARITY IS CONFIDENCE HOLT
Cash Return on Gross Investment
ROIC
CROIGI
CROGI
CFROI
ROE
Cash Return on
Gross
Investment
CLARITY IS CONFIDENCE HOLT
NOPAT
+Depreciation
+Other non-cash
items
Invested Capital
+
Accumulated
Depreciation
+
Capitalized
Expenses
... by adding back non-cash items to NOPAT and accumulated depreciation to Invested Capital This captures the total value of investment in the asset base more accurately
Operating After
Tax Cash Flow
Gross Investment = CROGI
ROIC
ROE
Cash Return on Gross Investment
CLARITY IS CONFIDENCE HOLT
Example: Two Plants
CROGI shows that
managers A and B
are achieving
similar cash returns
on the original
investment!
Plant A Plant B
NOPAT 100 100
Depreciation 50 50
Operating After Tax
Cash Flow 150 150
Invested Capital 500 1,000
Accumulated
Depreciation 500 0
Gross Investment 1,000 1,000
CROGI 15% 15%
Cash Return on Gross Investment
CLARITY IS CONFIDENCE HOLT
CROGI shows that
managers A, B and
C are achieving
similar cash returns
on the original
investment!
Plant A Plant B Plant C
NOPAT 100 100 100
Depreciation 50 50 0
Operating Leases 0 0 50
Operating After
Tax Cash Flow 150 150 150
Invested Capital 1,000 1,000 0
Accumulated
Depreciation 500 0 0
Gross Capitalised
Leases 0 0 1,000
Gross
Investment 1,000 1,000 1,000
CROGI 15% 15% 15%
Cash Return on Gross Investment – Operating Leases
These scenarios assume zero net working capital
CLARITY IS CONFIDENCE HOLT
Cash Return on Gross Investment
0.44
0.46
0.48
0.50
0.52
0.54
0.56
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Net PPE/Gross PPE
0.00
5.00
10.00
15.00
20.00
25.00
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
PPE Life
0.0
0.5
1.0
1.5
2.0
2.5
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Capex/Depreciation
Europe>1bn Eur ex Financials. Source Credit Suisse HOLT 2 Oct 2012
The Net/Gross plant ratio tells us that the PPE is
50% depreciated.
Capex/Depreciation is greater than one indicating
net growth
Plant life (GrossPPE/depreciation) has increased.
This could be caused by changes in sector
composition and weight over time.
CLARITY IS CONFIDENCE HOLT
Cash Return on Gross Investment
Issue CROGI Reason
Old Assets/New
AssetsYES
Accumulated depreciation is
added back
Asset Life No Not taken into account
Inflation NoCash flow is current dollars,
Invested Capital is historical
Accounting Distortions MaybeDepends on analyst
adjustments (op leases)
CLARITY IS CONFIDENCE HOLT
From an investor’s point of view…..
What is the impact of inflation on the
investment made ten years ago?
Are you measuring return on what you
spent ten years ago or on what that
investment is worth in today’s money
(current Dollars)?
Cash Return on Gross Investment
CLARITY IS CONFIDENCE HOLT
Differing Inflation Rates Make International Comparisons Difficult
Can you use CROGI to compare companies across time and in different countries?
Source Credit Suisse HOLT 2 Oct 2012
CLARITY IS CONFIDENCE HOLT
Cash Return on Inflation Adjusted Gross Investment
CROIGI is defined as Cash Return / Inflation Adjusted Gross Investment.
ROIC
CROIGI
CROGI
CFROI
ROE
Cash Return on
Inflation
Adjusted Gross
Investment
CLARITY IS CONFIDENCE HOLT
Operating After Tax
Cash Flow
Inflation Adjusted
Gross Investment
= CROIGI
Operating After Tax
Cash Flow
Gross Investment +
Inflation Adjustment on
Gross Investment
... by adding an inflation adjustment to the gross fixed assets to approximate their value in today’s money. This gives a fair value to the entire asset base, regardless of age.
ROIC
CROGI
ROE
Cash Return on Inflation Adjusted Gross Investment
CLARITY IS CONFIDENCE HOLT
Example: Two Plants
CROIGI shows that
plant A’s return is
actually less than
B’s when the value
of investment is
compared in today’s
money!
* Assuming 2% Annual Inflation
Cash Return on Inflation Adjusted Gross Investment
Plant A Plant B
Operating After Tax
Cash Flow 150 150
Gross
Investment 1,000 1,000
Age 10 0
Inflation
Adjustment* 220 0
Inflation Adjusted
Gross Investment 1,220 1,000
CROIGI 12% 15%
CLARITY IS CONFIDENCE HOLT
Year 1 2 3 4 5 6 7 8 9 10
USA Inflation 3.9% 2.8% 2.6% 2.4% 2.5% 2.3% 1.6% 0.6% 1.4% 2.2%
SA Inflation 13.5% 12.7% 10.4% 9.8% 8.8% 8.4% 7.8% 7.7% 6.8% 6.2%
Avg Exchange Rate 2.76 2.85 3.27 3.55 3.63 4.3 4.61 5.55 6.12 6.94
Life (Years) 10
Analysys in USD
Cost in USD 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000
Accumulated Depreciation 100 200 300 400 500 600 700 800 900 1000
Net Asset Value 900 800 700 600 500 400 300 200 100 0
GCF 150 154 158 162 166 170 173 174 176 180 Grows with US inflation
Inflation Adjusted Cost 1,000 1,028 1,055 1,080 1,107 1,133 1,151 1,158 1,174 1,200 Grows with US inflation
ROIC 15% 17% 20% 23% 28% 34% 43% 58% 88% 180%
CROGI 15% 15% 16% 16% 17% 17% 17% 17% 18% 18%
CROIGI 15% 15% 15% 15% 15% 15% 15% 15% 15% 15%
CFROI 8% 8% 8% 8% 8% 8% 8% 8% 8% 8%
Analysys in ZAR
Cost in USD 2,760 2,760 2,760 2,760 2,760 2,760 2,760 2,760 2,760 2,760
Accumulated Depreciation 276 552 828 1,104 1,380 1,656 1,932 2,208 2,484 2,760
Net Asset Value 2,484 2,208 1,932 1,656 1,380 1,104 828 552 276 0
GCF 414 467 515 566 615 667 719 774 827 878 Grows with SA inflation
Inflation Adjusted Cost 2,760 3,111 3,434 3,771 4,102 4,447 4,794 5,163 5,514 5,856 Grows with SA inflation
ROIC 15% 19% 23% 29% 37% 48% 65% 94% 150% 318%
CROGI 15% 17% 19% 20% 22% 24% 26% 28% 30% 32%
CROIGI 15% 15% 15% 15% 15% 15% 15% 15% 15% 15%
CFROI 8% 8% 8% 8% 8% 8% 8% 8% 8% 8%
GP Factor in USA 1.00 1.03 1.05 1.08 1.11 1.13 1.15 1.16 1.17 1.20
GP Factor in SA 1.00 1.13 1.24 1.37 1.49 1.61 1.74 1.87 2.00 2.12
Notes
1. A South African company buys an asset in US$ in 1991 and places it on its books in ZAR. The asset does not get revalued
2. The company produces a profit stream that can be priced in US$ or ZAR. Products are sold at a local price or global commodity price
3. It is assumed that NDA (working capital) is zero for the CFROI calculation.
Why Is It Important to Adjust for Inflation?
CLARITY IS CONFIDENCE HOLT
Cash Return on Inflation Adjusted Gross Investment
Issue CROIGI Reason
Old Assets/New
AssetsYES
Accumulated depreciation is
added back
Asset Life No Not taken into account
Inflation YESNumerator and denominator
are in current dollars
Accounting Distortions MaybeDepends on analyst
adjustments (op leases)
CLARITY IS CONFIDENCE HOLT
Cash Return on Inflation Adjusted Gross Investment
What if two projects with the same return
have different lives?
How do you select the correct one?
For the same investment would you choose
a 10% project with a 5 year life or a 10 year
life?
CLARITY IS CONFIDENCE HOLT 31
Gross Cash Flow
Gross Investment
£12,249
£77,174
Gross Cash Flow
Gross Investment
€5,449
€34,343
Ericsson and GSK’s returns look the same……..but are they?
= = 15.9%
GLAXOSMITHKLINE PLC (2009)
= = 15.9%
ERICSSON LM (2009)
Source Credit Suisse HOLT 2 Oct 2012
CLARITY IS CONFIDENCE HOLT
Cash Flow Return On Investment (CFROI®)
ROIC
CROIGI
CROGI
CFROI ®
ROE
Cash Flow
Return on
Investment
CLARITY IS CONFIDENCE HOLT
Gross Cash
Flow
Current £
Gross
Investment
Life = 4 Years
50
10
100
Life helps measure the economic return earned
today, by forecasting how much cash flow will
be received over a realistic time period.
Consider a £100 investment that earns £10 in
cash flows for 4 years. The CROIGI return
“looks” like 10% (10/100), yet when life is
considered, the economic return (CFROI) is
negative.
10% return?
CFROI = - 3.1%
Why is Project Life so Important?
CLARITY IS CONFIDENCE HOLT
Infl. Adj.
Gross Cash
Flow
Current
Gross
Investment
10
100
Consider that same £100 investment that earns £10 in cash flows for 30 years.
The CROIGA return “looks” like 10%, however, the cash flows are forecasted to
last 30 years, making the economic return 9.68%.
10% return?
Non-Depreciating
Asset Release 50
Life = 30 Years
CFROI = 9.68%
Why is Project Life so Important?
CLARITY IS CONFIDENCE HOLT
CFROI® Not Distorted By Asset Mix
100
Machine Tools
10 Years
Distribution Company
10
20
100
10 Years
10
75
IRR = 3.0%
IRR = 8.3%
CLARITY IS CONFIDENCE HOLT 36
Gross Cash Flow
Gross Investment
£12,249
£77,174
Gross Cash Flow
Gross Investment
€5,449
€34,343
CFROI accounts for asset life differences offering more insight
than a ratio
= = 15.9%
GLAXOSMITHKLINE PLC (2009)
= = 15.9%
ERICSSON LM (2009)
Asset l ife: 6.2 years
Asset l ife: 12.4 years
CFROI = 6.9%
CFROI = 12.6%
Traditional Return Metric (Ratio) CFROI
Source Credit Suisse HOLT 2 Oct 2012
CLARITY IS CONFIDENCE HOLT
Adjustments Are Essential to True Economic Performance
Measurement
ROIC
CROIGI
CROGI
CFROI
ROE
Cash Flow
Return on
Investment
Adjustments
Accumulated Depreciation
Inflation Adjustment
Asset Life
Enterprise level
measure
CLARITY IS CONFIDENCE HOLT
From Cash To CFROI® (Internal Rate of Return)
Net Monetary Assets
+ Inflation Adjusted Land & Improvements
+ Investments (Non-Equity Method )
+ Inventory (w/ LIFO Inventory Reserve)
+ Other LT Assets less Pension Assets
Net Income (Before Extraordinary Items)
+/- Special Items (after tax)
+ Depreciation/Amortization Expense
+ Interest Expense
+ R&D Expense
+ Rental Expense
+ Minority Interest Expense
+ Net Pension Cash Flow Adjustment
+ LIFO charge to FIFO Inventory
+ Monetary Holding Gain/Loss
- Equity Method Investment Income
£100
Inflation Adjusted
Gross Investment
13-Year Asset Life
£10
£25
Gross Cash Flow
CFROI® = 6.0%
Non-Depreciating Assets
Net Book Assets
+ Accumulated Depreciation
+ Inflation Adjustment to Gross Plant
+ LIFO Inventory Reserve
+ Capitalized Operating Leases
+ Capitalized R&D
- Equity Method Investments
- Pension Assets
- Goodwill
- Non-Debt Monetary Liabilities & Deferred Taxes
CLARITY IS CONFIDENCE HOLT
Positive Spread
Business
Neutral Spread
Business Negative Spread
Business
Discount Rate (Cost of Capital)
• Increase returns
• Hold returns
and grow assets
• Increase returns
• Then grow
• Increase returns
• Reduce
Reinvestment
• Divest or Liquidate
Return Measure
Strategic Options
Rules for Value Creation – What is Good Growth?
Managing for shareholder value requires an understanding of the trade-off between cash flow returns and growth. Capital
should be allocated to positive spread businesses and projects that are creating value. Marginal businesses should
concentrate on improving operating efficiencies instead of growth.
CLARITY IS CONFIDENCE HOLT
40
0
60
120
180
240
-5 0 5 10 15 20 25
0
20
40
60
80
-5 0 5 10 15 20 25
0
100
200
300
400
500
600
700
800
900
1000
-5 0 5 10 15 20 25
0
100
200
300
400
500
600
700
-5 0 5 10 15 20 25
CFROI Observations: Fade Happens
0
50
100
150
200
250
300
-5 0 5 10 15 20 25
0
50
100
150
200
250
300
350
400
450
500
-5 0 5 10 15 20 25
Ending CFROI (t+5) Initial CFROI
(t+1)
10-15%
6-10%
15-20%
USA Large & Mid-Cap:
1980-2005
CLARITY IS CONFIDENCE HOLT
41
0
20
40
60
80
100
120
140
-20 -10 0 10 20 30 40
`
0
5
10
15
20
25
30
35
40
45
-20 -10 0 10 20 30 40
`
0
100
200
300
400
500
600
700
-20 -10 0 10 20 30 40
0
20
40
60
80
100
120
140
-20 -10 0 10 20 30 40
0
50
100
150
200
250
-20 -10 0 10 20 30 40
0
10
20
30
40
50
60
70
80
90
-20 -10 0 10 20 30 40
Growth Observations: Fade Really Happens!
Initial Growth
(t+1)
20-30%
10-20%
-20 to -10%
Ending Growth (t+5)
USA Large & Mid-Cap:
1985-2005
CLARITY IS CONFIDENCE HOLT
Drivers of Firm Value
Firm Value = PV Cash Flows + Market Value of Investments
Returns vs. Discount Rate, Asset Growth and hence, Sales Growth, Competitive Advantage Period, Fade Rate of Returns and Asset Growth ∫ Firm Value =
CLARITY IS CONFIDENCE HOLT
Valuation Continuum
PE Multiple
EPS Growth
PEG Ratio EV/EBITDA
Price/Sales
Tobin’s Q
Price/Book
Value/Cost
Discounted EVA®
Gordon Growth
Dividend Discount Model
Discounted FCFF
HOLT CFROI DCF
Real Options
Increasing Sophistication and Completeness
Relative Valuation Cash Distribution Models
Cash Production Models
Variance and
Probability Models
Monte Carlo
Simulations
CLARITY IS CONFIDENCE HOLT
Case Study: NOKIA
ROIC rises while price, TSR and other measures are falling…why?
NOKIA CORPORATION
0.00
500.00
1000.00
1500.00
2000.00
2500.00
-10.00
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
ROE ROIC CROGI CROIAGI CFROI Price TSR (RHS)
Source Credit Suisse HOLT 2 Oct 2012
CLARITY IS CONFIDENCE HOLT
0
10
20
30
40
50
60
70
80
90
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
NOPAT Operating Invested Capital ROIC (RHS)
Case Study: NOKIA – ROIC – why so volatile?
Invested capital is the problem
Source Credit Suisse HOLT 2 Oct 2012
CLARITY IS CONFIDENCE HOLT
Case Study: NOKIA – ROIC – why so volatile?
Current assets declined from 2000 to 2004 while current liabilities remained relatively unchanged. Assets increased significantly from 2006 without a proportional increase in current liabilities.
-30,000
-20,000
-10,000
0
10,000
20,000
30,000
40,000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Plant (Net) Current Assets Current Liabilities Other Long Term Assets
Source Credit Suisse HOLT 2 Oct 2012
CLARITY IS CONFIDENCE HOLT
0
5
10
15
20
25
30
35
0
10,000
20,000
30,000
40,000
50,000
60,000
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Working Capital Gross Fixed Assets Gross Investment Gross Cash Flow (RHS) CFROI (RHS)
0
5
10
15
20
25
30
35
0
10,000
20,000
30,000
40,000
50,000
60,000
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Working Capital Gross Fixed Assets Gross Investment Gross Cash Flow (RHS) CFROI (RHS)
0
5
10
15
20
25
30
35
0
10,000
20,000
30,000
40,000
50,000
60,000
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Working Capital Gross Fixed Assets Gross Investment Gross Cash Flow (RHS) CFROI (RHS)
0
5
10
15
20
25
30
35
0
10,000
20,000
30,000
40,000
50,000
60,0001
988
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Working Capital Gross Fixed Assets Gross Investment Gross Cash Flow (RHS) CFROI (RHS)
0
5
10
15
20
25
30
35
0
10,000
20,000
30,000
40,000
50,000
60,000
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Working Capital Gross Fixed Assets Gross Investment Gross Cash Flow (RHS) CFROI (RHS)
Case Study: NOKIA – ROIC – why so volatile?
0
10
20
30
40
50
60
70
80
90
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
NOPAT Operating Invested Capital ROIC (RHS)
Source Credit Suisse HOLT 2 Oct 2012
CLARITY IS CONFIDENCE HOLT
Case Study: NOKIA – through the CFROI lens
Source Credit Suisse HOLT 2 Oct 2012
CLARITY IS CONFIDENCE HOLT
Case Study: WPP plc – high returns and growth have not delivered
Source Credit Suisse HOLT 2 Oct 2012
CLARITY IS CONFIDENCE HOLT
Case Study: TESCO plc– Sale and leaseback has increased ROIC
Source Credit Suisse HOLT 2 Oct 2012
CLARITY IS CONFIDENCE HOLT
The Ideal Performance Metric
Question ROE ROIC CROGI CROIGI CFROI
Old Assets/New
AssetsNo No Yes Yes Yes
Asset Life No No No No Yes
Inflation No No No Yes Yes
Accounting
DistortionsNo No Partial Partial Yes
CLARITY IS CONFIDENCE HOLT
Conclusions
• Return measures are essential to our understanding of companies
• They can be volatile which makes forecasting difficult and uncertain
• Mean reversion happens
• Most important of all……………
• Returns are not a measure of either absolute or relative value.
• You need to know what you are measuring
• You need to know what your measure is telling you
CLARITY IS CONFIDENCE HOLT 53
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Backtested, hypothetical or simulated performance results have inherent limitations. Simulated results are achieved by the retroactive application of a backtested model itself
designed with the benefit of hindsight. The backtesting of performance differs from the actual account performance because the investment strategy may be adjusted at any time,
for any reason and can continue to be changed until desired or better performance results are achieved. Alternative modeling techniques or assumptions might produce
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The HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations,
collectively called the HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates)
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