Cash Return on Capital Invested
Abstract
In this book, Pascal Costantini gives a lively and wonderfully readable account of ten years of efforts by a small group of investment analysts to find a reliable, practical and implementable method for valuing and selecting shares. The result of their effort is an original investment methodology called CROCI (Cash Return on Capital Invested), best described as a variation of the economic profit model. For over a decade now, Costantinis group at Deutsche Bank has been using this valuation tool every time it has had to take a view on the pricing of an equity asset, be it a market, a sector or an individual sharein other words, every single working day, since it is this groups job to advise institutional investors on equity valuation. Costantini describes in detail, accompanied by concrete examples in the form of charts and graphs, the precise investment results of the actual implementation of the CROCI approach in the global equity markets since 1996. Readers will enjoy taking this journey with Costantini to see how and why the model was developed, assess the results of ten years of actual implementation and measure the successes of using this model in stock picking and portfolio construction. This book will also make it easy for them to see how the CROCI approach can be used successfully by others now and in the future. The book is divided into four parts. The first part is a review and discussion of the fundamentals of investment analysis. The second part is dedicated to the construction of economic data, with the sole objective of calculating an economically meaningful asset multiple and relative return, the combination of which gives an economic PE ratio, the authors main stock selection tool. While the economic profit model is not exactly new, it is still largely ignored by the investment community. In essence, it does three things: it calculates the real amount of cash, or value created by a business; it compares the market value of an asset to an approximation of its replacement value; and it assumes that the former will converge to the latter through the arbitrage of investors and capital providers. The third part is dedicated to the analysis of economic data, and the last part deals with the actual implementation of the CROCI economic profit model, including real life examples. This final part also discusses how to use the output of the CROCI model with individual stocks, and then with investment portfolios. *Techniques are based on the authors performance record at Deutsche Bank since 1996 *Based on almost ten years of proprietary knowledge and implementation of these techniques *Factual illustrations of the results of the valuation techniques are provided at each step.
... a. the first general formula shows how the Goodwill value is equal to the sum of the i-th expected (for a certain n competitive advantage period) extra net incomes (ENI) discounted at the i-th cost of equity CoE (in other word Goodwill is equal to the net present value of future extra net incomes; as in the same way it's equal to the net present value of future discounted cash flows, Costantini, 2006): ...
From always, strategy and value creation are linked by a precise cause and effect relationship. In particular, companies challenge each other to identify and realize the most suitable strategies to create competitiveness and economic value and the latter is recognized, by the scientific community as well as from the professional world, as the true measure of the quality of the company strategies. In this direction, the present essay investigates the possibility to evaluate the quality of the strategic process of the company through its mapping of the strategic positioning and sequencing in turn based on the metric of the current value creation, i.e. the realized results in the present, and the strategic value creation, i.e. the sown results for the future. The possible combinations of the mentioned above current and strategic value creation highlight four main types of business strategy: the long vision strategy opposed to the no future strategy and the harvesting/breath strategy opposed to the changing strategy. In this direction, the best company is the one who knows how to collect results in the present (i.e. a positive current value creation) and at the same time it is able to sow/invest for the future (i.e. a positive strategic value creation). At the end the above relationship between strategy and value creation is synthetically applied to the Wholesale Spare Parts Distributors operating in the Italian Automotive Independent After Market for the period 2008-2011: the sample, composed of 168 limited companies, represents more than 98% of the value of total production (approximately 2,0 billion euro).
In the older treatments of depreciation the cost, or “theoretical selling price” of the product of a machine, was conceived of as determined causally by the addition of a number of items of which depreciation is one. In other words, depreciation was first computed by some rather arbitrary formula not involving the theoretical selling price, which was then found by the addition of depreciation to operating costs and division by quantity of output. It will be shown in this paper that depreciation and theoretical selling price must be computed simultaneously from a pair of equations which are frequently a bit complicated. The differences in the results obtained from the arbitrary and mathematical formulae are often very large.