west

Nate, what types of local businesses would you recommend? Where I grew up, there was almost nothing of any scale except retail. That, and an absolutely incredible ice cream shop chain. So I've got nothing to go off of. (Off topic, I always thought it would be fun to own that place, because I'm positive it's a See's-like business in every way you can think of. It's too bad it's named Whitey's. I'm guessing that might limit it's scalability...)

I wish Damodaran had this data going back to the 1950s :) On the M&A data, there's mergerstat and CapitalIQ, but both are not things I have access to...

Whoops, I missed your post opihiman... Not quite a walk in the park. Not by any stretch ;). I was very lucky that I had nothing going on (even employment-wise) at the time. It was a little bit of column A, a little bit of column B for me. I was getting bored because a lot of it was all the same stuff. But I was also very frustrated by the whole "having to learn a whole new language to do the exact same thing I was already doing" thing. It's great that there's constant innovation in tech, but I like to invest in learning stuff that's going to be around for the long haul. I don't think that's true for most things (outside of theory) in tech... Trading strategies aren't really my cup of tea. I'm pretty lazy when it comes down to it. I like to sit around and read. I maybe check the market once or twice a day. Being tied to a desk constantly watching a screen isn't really my style. Maybe not all trading strategies are like this, but that's my prejudice.

Thanks Packer. I guess I was more interested in looking how multiples have shifted over time than how to use them or come up with them for valuations. I wanted to understand how investor psychology has shifted over time so I can (hopefully) better understand where different industries are at now in terms of that psychology. For example, I don't know, but I have strong feeling that telecom ratios were very high in the late 90s and early 2000s. And since then they've only drifted down? It would be interesting to see, say, if we're at a nadir, or anywhere close, for telecom/cable multiples.

This isn't super helpful (like I said, it's pretty out of date), but you can download the old Cowles book mentioned in Security Analysis for free here: http://cowles.econ.yale.edu/P/cm/m03-2/

Hi all. In the last week I've finally been sitting down and reading Security Analysis. It's great! I wish I would have read it earlier. It's much more modern in its thinking than I would have ever expected. The problem though is much of the stuff they source is very out of date. So you can't really look into it. For example, in Chapter 41, Graham and Dodd talk about how the market will value companies in different industries by using different E/P ratios, saying (with a warning): Different "multipliers" are used for different sorts of enterprise, but these distinctions are themselves subject to change with the changing times. - Security Analysis, 6th Edition, p526-527 In the footnotes they source Common Stock Indexes by Alfred Cowles as a study of these historical ratios. The problem is, that book is almost eighty years old! Does anyone have a more modern study of industry ratio shifts? I'd love to read about how they've changed over time. Thanks in advance!

Actually, it turns out it will not necessarily lower the ROIC. The missing piece in this discussion is what the analyst uses as cost of capital to make the adjustments of both the numerator and denominator. Excess Return = ROIC - Cost of Capital, and both of these variables will change when you capitalize leases, resulting in an unpredictable effect on Excess Return (and thus on discounted cash flow value of equity). For most firms, Excess Return will decrease, but for many it will actually increase. Damodaran himself did a study on the effect of capitalizing leases, showing many such increases. http://people.stern.nyu.edu/adamodar/pdfiles/papers/newlease.pdf See pages 30, 31 for the effect on discounted cash flow value. The appendix show the results of his study. Many, many thanks, cobafdek! I will definitely have to check this out. (But not tonight!)

The only benefit to using pre-tax numbers is there's a lot less "noise". You *have* to consider taxes though. After all, you can't reinvest what the government takes. What I like to do is use the pre-tax ROIC and then apply an assumed tax rate to it. The tax rate I assume is primarily based on the country/state the company is in, and also based on how well the company has managed taxes in the past. A ten year average effective tax rate will probably work, if you're looking for a simple method, but you have to be careful for one-time tax issues as well as potential changes in tax rates that happened during the period.

Taking on a lease is the same as taking on debt. Instead of buying machinery that has a life of 10 years you take on amortizing debt for a term of 10 years and they are essentially the same. You would have incurred a contractual liability. I totally understand the leases as debt aspect of things. I always use the PV of leases when calculating EV (at least when I can read about them... with my Japan companies I can't). The thing I don't understand is... ROIC *should* measure the return on *invested* capital. Not the return on *future* invested capital. If I willingly extend a lease I'm in because I can lock in a below market rate, and I end up doing this because it will benefit me more to do so than waiting to do so will, doing that will *lower* my current ROIC. That makes no sense! The return on the capital I've invested should remain the same! I haven't fronted any money yet, so my current economic returns should remain the same. At least I think so. Maybe we're confusing apples and oranges though. In Damodaran's books, he talks about ROC (Return on Capital), *not* ROIC (Return on *Invested* Capital). Maybe we're making the mistake of assuming they're the same thing?

For what it's worth, I reviewed Damodaran's online material, and he *does* use the PV of leases in the Invested Capital part of the ROIC calculation (along with a bunch of other stuff like capitalized R&D, advertising, etc.): http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/ROIC.mp4 I still don't understand the rationale of why you would put the PV of future leases into your ROIC calculation though, so I sent him an email about it. He hasn't responded yet, but I've had decent luck with talking with him in the past. We'll see what happens.

No, I had no idea about that! I don't have a Fidelity account, but I would happily open one with little bit of money if this service is any good. Could you attach the reports for Fujimak (JP:5965), Sapporo Clinical Labs (JP:9776), and Nansin Co (JP:7399) to this thread so I can see what they're like? It would be much appreciated!

Hey opihiman. On the CFA stuff, I don't remember. I didn't have a job for (most of) the time I was doing Level II and Level III, so I think it was about eight to ten weeks? However, I'm a little "special" in the fact that I work practically all the time. When I did those eight to ten weeks, most days I was doing more than ten hours of study a day, and I know I clocked in at least one fourteen hour day once a week. Sooo... Assuming eleven hours a day on average, seven days a week... Maybe 600 to 800 hours? I looked online and I'm seeing estimates that say most candidates study for more than 300 hours per level. Still, my numbers (if they're even correct... I'm doing an estimate at this point) are double that. I'm a little slow when it comes to studying stuff, but I would still take my estimated hours of studying with a massive grain of salt.

Hey opihiman. On the CFA stuff, I don't remember. I didn't have a job for (most of) the time I was doing Level II and Level III, so I think it was about eight to ten weeks? However, I'm a little "special" in the fact that I work practically all the time. When I did those eight to ten weeks, most days I was doing more than ten hours of study a day, and I know I clocked in at least one fourteen hour day once a week. Sooo... Assuming eleven hours a day on average, seven days a week... Maybe 600 to 800 hours? Sorry if this isn't a great answer... On why I'm switching out of software, I like learning the 10% that matters 90% of the time in all subject areas. You name it. Computers... Bikes... How specific industries like, why not?, the fertilizer industry works. When you're doing investment research, you're doing nothing but learning about new stuff. All the time! I like that. In software I felt like I learned everything there was to know in my area (minus the extreme nuances) and that I was just repeating the same stuff over and over. It became very boring. Plus, I was subject to a lot of forces outside of my control, which I didn't really care for. (I still like software. A lot. I just don't want to do systems coding 40+ hours a week any more.) Just curious, but is that a similar reason as to why you switched?

I second Nate's wow! (And that I wish I knew about this earlier.) Many thanks for this! It will definitely come in handy, especially since MSN Money just changed their website design. So I needed to write a new scraper anyways :)

Hey folks! Over the course of the last few years, I've been collecting financial data for Japanese companies and looking at how different quantitative value strategies have performed in Japan. I recently wrote a paper on how eight different quantitative value strategies performed in Japan during 2013. Suffice it to say, they did very well. The top three strategies returned over triple-digit returns. In just one year's time. (Although, to be frank, it was an exceptional year for the market. Triple-digit returns are still pretty cool in my book though.) You can find my paper here: http://www.dusthimer.net/PDF/Quantitative-Value-in-Japan.pdf Skip to the top of page eight (to Table 1) if you just want to see how the strategies performed. Enjoy! PS- For some quick self-promotion (which was OK-ed by Sanjeev), I'm currently looking for a job doing equity research. Check out the rest of www.dusthimer.net if you want to see some of the other stuff I've done. Shoot me an email at [email protected] if you want to talk. I'll be out the rest of today, but I'll get back to you as soon as I can.

EBIT is Earnings Before Interest and Taxes. So interest expense is removed, as I believe you are suggesting.

ROIC measures the quality of the whole business regardless of capital structure (high debt, low debt, no debt, whatever). ROE is capital structure *dependent. Debt levels do not effect the "quality" of a business. They only measure how much of the business (the slice of the "pie") belongs to the debt-holders versus the equity-holders. (At least for the sake of this discussion.)

vinod1, but he uses the Book Value of Debt, NOT Adjusted Debt, in the denominator of the ROIC calculation. Adjusted Debt is used in other locations, like in the EV calculation.

I double-checked Damodaran (wooo for a very socially active Wednesday night), and he doesn't bring in the PV of leases, nor does Greenblatt. However, I do see a couple of sources that say that you should (Investopedia, for example). I guess my feeling at this point is IC should include the money that's been sunk into the business so far, not the money that will need to be sunk (*ahem*... "invested") in the future. After all, extending the life of my business's leases will increase the present value of my total liabilities, but it won't decrease my current economic returns.

Thanks for the responses, I guess the book I was reading used a more Damodaran approach. On leases, they're off balance sheet, but they are still capital invested that's required to run the business. Think of it this way, if you owned a donut shop and leased space I'm sure you'd calculate your return after your rent payment. Ignoring the rent provides artificially inflated numbers. Without the location you have no business. The next question then becomes what's the correct discount rate for the leases. Again, I still need to look into this (and see what people smarter than me have said), but current rent expense is included in EBITDA. There's no reason to double count it by bringing the PV of *future* leases into the ROIC calculation. After all, you're looking at your *current* invested capital and current returns. I think (emphasis on "think") the PV of leases is appropriate to include in EV, but not in IC.

Fwiw, I can't remember if the PV of leases is actually appropriate to include in the denominator of the calculation. I'll have to look it up/think about it. As of right now, I'm thinking they shouldn't be there...

That's the million dollar question. I'm on my phone so I won't be answering this as well as I'd like. In general, there are two approaches. The first is what I like to call the Greenblatt approach, which is EBIT / (Net Working Capital, minus Excess Cash + Net PP&E). This ignores Goodwill and potentially a bunch of other stuff. The other approach is what I like to call the Damodaran approach, which is (EBIT * (1 - Tax Rate)) / (Book Value of Equity + Book Value of Debt - All Cash). There are pros and cons to both approaches. The problem with *both* approaches is that EBIT is the numerator under the assumption that Depreciation = Maintenance CapEx (MCX), which is not the case for anything except for maybe stable firms. The numerator really should be Free EBITDA, which is EBITDA - MCX. You can determine an approximate MCX using quantitative methods, but it is too complex to describe via typing on my phone. (Oh, also there's ROIIC, which is Return on *Incremental* Invested Capital, which is just as important, if not (potentially) more important, than ROIC. It measures how much return you're getting on *new* capital investments.)

I'm not 100% sure I understand, but whether debt adds to the equity value of a firm is determined by the company's return on the capital that was provided by that debt. In other words, if they pay 10% interest on the debt (after the tax deduction), but they only return 10% on the investment they made from the money from the debt, the equity gained no value. If they are able to get 20% returns on that new money, some value does accumulate to the equity. For what it's worth, you should never look at the value of the equity alone. You should only look at a company in the "firm" or "enterprise value" sense -- the total value of it. If you can't do this, you need to go back to square one, or you're going to make mistakes that you don't want to make. I highly recommend going through Aswath Damodaran's lectures. He posts them online for free (a top NYU MBA class... normally requires $100k+ in tuition plus two years of your life... for free). You can get through them in a month if you can dedicate the daily time to watching them. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqspr14.htm (I link to the spring classes because they're all there. The fall session isn't all there yet.)

I'm not answering your question as you asked it, so apologies for that. However, for what it's worth, I no longer consider ROE (unless I'm looking a grossly overcapitalized company, like some of my Japanese stock recommendations). I only look at ROIC. I do this because ROE can really be distorted. It can be distorted by capital structure (high debt can mean higher ROE, which doesn't necessarily translate into a higher justified equity value), tax effects (tax rates in different areas or NOLs for one company and not for the other), and other income (by default, if you don't adjust them out, one time income items will show up in net income, which is the numerator for ROE). So I would skip ROE (and Market Cap based ratios) and stick with ROIC (and EV based ratios) imho.

No problem! I hope someone can get something useful out of it :)