Joel Greenblatt ROIC Question

[fishwithwings]

When calculating the denominator, Invested Capital, why is short term debt excluded? thanks!

[CapriciousCapital]

Short term debt is included in invested capital by excluding it from the working capital calculation in this case. Invested capital = capital provided to the operating business by debt and equity investors.

 

[fishwithwings]

Thank you!

[fishwithwings]

A follow up question - With the new account change, do you add "Operating lease right-of-use assets" in the denominator? 

 

What about the numerator?  How do you adjust that?

[Cigarbutt]

^Before, there were two steps: 1-capitalize the value of operating leases (many ways) , add to invested capital and 2-add back the imputed interest.

Now, due to the new standard,  step one has been capitalized already and still needs to be added to invested capital and imputed interest still needs to be added back to EBIT.

[spartansaver]

^Before, there were two steps: 1-capitalize the value of operating leases (many ways) , add to invested capital and 2-add back the imputed interest.

Now, due to the new standard,  step one has been capitalized already and still needs to be added to invested capital and imputed interest still needs to be added back to EBIT.

 

To expand on this a bit further, GAAP capitalizes rent and does nothing to the income statement. IFRS capitalizes and also makes adjustment to income statement for an implied interest expense. When looking at companies, it’s important to understand what multiple the company is capitalizing its leases at, because a company can easily manipulate the inputs.

 

I personally am not sure capitalizing leases is the proper way to go about things. For example, should using a third party for cloud storage be capitalized? You are essentially benefiting from the other company building all of the storage, and your company is paying a fee on that storage. Why should certain expenses be capitalized with an imputed interest expense while others are not? A lease also does not operate on the same terms as a debt instrument. Each lease can almost be thought of as a non-recourse loan, with minor penalties for cancellation relative to a loan.

[CapriciousCapital]

You have to add back the interest expense portion of capitalized lease depreciation to get EBIT.