Hi thanks for article. Have a question on the calculation of reinvestment rate. The calculations alludes to the difference between capital invested in two periods which could include debt if incurred during the period. Wouldn't that not be misleading as it is not purely reinvestmnet of earnings ?Furthermore, if debt thats taken on is very high, it could mean reinvestment rate higher than 100%? Am I missing something, hope to get your input. Thanks
Yes, absolutely, that could be the case. However, that would mean the earnings are kept in the balance, or paid out. This is only one step of the analysis, the one you are pointing out, totally right, would be the capital allocation assessment. And in that point you could determine whether you think it makes sense or not ;) Taking on debt to get attractive returns on this capital can be very profitable, but also increase the risk profile of the company. Each case would be different.
Thanks for the reply. The reason I bring this up is because in the discussion about Costco and Walmart, you mentioned reinvestment of earnings of 58% and 26% respectively when the calculations shows reinvestment of capital including debt. So got me wondering a little there. But I gather now its capital reinvestment and not earnings reinvestment. Just to add, if we were to distil the formula further for compounding rate = ROIIC x Reinvestment rate = ∆NI / sum NI for the period . Thanks again for your reply ;)
Excellent 2. Part. Keep it up the good work, thanks!
Excellent topic 💪🏻 thanks
Hi thanks for article. Have a question on the calculation of reinvestment rate. The calculations alludes to the difference between capital invested in two periods which could include debt if incurred during the period. Wouldn't that not be misleading as it is not purely reinvestmnet of earnings ?Furthermore, if debt thats taken on is very high, it could mean reinvestment rate higher than 100%? Am I missing something, hope to get your input. Thanks
Yes, absolutely, that could be the case. However, that would mean the earnings are kept in the balance, or paid out. This is only one step of the analysis, the one you are pointing out, totally right, would be the capital allocation assessment. And in that point you could determine whether you think it makes sense or not ;) Taking on debt to get attractive returns on this capital can be very profitable, but also increase the risk profile of the company. Each case would be different.
Thanks for the reply. The reason I bring this up is because in the discussion about Costco and Walmart, you mentioned reinvestment of earnings of 58% and 26% respectively when the calculations shows reinvestment of capital including debt. So got me wondering a little there. But I gather now its capital reinvestment and not earnings reinvestment. Just to add, if we were to distil the formula further for compounding rate = ROIIC x Reinvestment rate = ∆NI / sum NI for the period . Thanks again for your reply ;)