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Technology Stocks : Applied Materials No-Politics Thread (AMAT)
AMAT 317.97-2.8%Jan 20 3:59 PM EST
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To: Cary Salsberg who wrote (3283)9/26/2002 8:49:31 AM
From: Mark Marcellus  Read Replies (1) of 25522
 
I was responding to the statement that there is no defined relationship between earnings and book value. ROIC is an example of an often used metric which defines that relationship. There are obviously all sorts of variables one needs to consider. Taking the other side of your example, there is more risk in anticipated future growth than there is in a stable company with good ROIC and a long history in paying dividends. You should expect to receive a risk premium for the former.

Those who are really serious about these sorts of things should be using (and calculating for themselves) free cash flow instead of earnings, but if you're looking at results over a number of years, earnings is probably good enough.

There's another metric I learned from someone that addresses some of what you're talking about. He calls it RORE (Return on Retained Earnings). The formula is:

NI = Net Income
RE = NI - Dividend

RORE = (TY NI - LY NI)/((TY RE + LY RE)/2)

From that he also derives his version of an internal growth rate (IGR).

RR (Retention Ratio) = RE / NI
IGR = RORE * RR

Historically, AMAT does quite well under these metrics. A rule of thumb is that an RORE of 15% or above is quite good. AMAT often hits the 20's.
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