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Strategies & Market Trends : Buffettology -- Ignore unavailable to you. Want to Upgrade?

To: James Clarke who wrote (425)	10/17/1998 1:32:00 AM
From: Tomato	Read Replies (1) \| Respond to of 4691

James, Thanks a lot. I think I have more ROE questions, but I'd better re-read the ROE section in the Buffettology book and hope they come back to me. Off topic- I have a question about figuring the NPV of a commodities business. I see in analysts' reports that they use a discount rate to figure the value of the business x years out into the future based on a stream of income from sales of the commodity, but I don't understand what discount rate one should use. E.g. there's one report on Aber Resources, a diamond stock, where they have a table, one with zero discount, one with 5%, and a third with 10%. Should one use the Fed funds rate? What is the logic behind choosing a figure? Thanks in advance.

To: James Clarke who wrote (425)	10/17/1998 1:46:00 AM
From: Shane M	Respond to of 4691

Jim, More ROE discussion. Was wondering if you had any comments on ROE as it relates to the balance sheet debt levels. I was recently looking at the three major office supply superstores, Office Depot, Staples, and Office Max (ODP, SPLS, OMX), and the balance sheets for the first two carry debt, while OMX carries very little debt. LTD/Equity ratios ODP 31.9% SPLS 49.9% OMX 1.5% ROE ODP 13.2% SPLS 15.1% OMX 7.9% Net Margin ODP 2.7% SPLS 2.8% OMX 2.4% As I looked, the only major distinction between the companies I could find was that OMX carried low debt, which logically can be linked to their lower ROE given that their historical margins are in line with the competition. Would it be correct to say that OMX, in order to maximize shareholder value should leverage itself by taking on debt in order to increase ROE? Or would it be fairer to say that in this case ROE is an inaccurate gauge of the value of the company? Given the striking different balance sheets of these very simlar competitors I have to think OMX management would have a reason for keeping the low debt levels, even though it hurts ROE for stockholders. Any comments appreciated. Shane

To: James Clarke who wrote (425)	10/17/1998 5:14:00 PM
From: jhg_in_kc	Read Replies (1) \| Respond to of 4691

James Clarke, your fine post on ROE leads me to ask, What is the difference between ROE and ROIC, return on invested capital? Can you give an illustration to help me underestand the distinction? jhg

To: James Clarke who wrote (425)	10/18/1998 4:40:00 PM
From: cfimx	Read Replies (3) \| Respond to of 4691

james, the latest I read from web is that he doesn't think roe is necessarily the best way to look at all companies. he cites ko as an example that if they distributed ALL their capital to owners and went negative equity, that it wouldn't change the enterprise value at all, but would of course render ROE calculations useless. In this sense I can understand why he was fond of this ratio - the return on inventories + plant and equipment (this from J train's THe Money Masters) as well as ROIC. ROE is a starting point - many compaines are eating away at the denominator with share repurchases. Speaking of which, I know you like to tease us about abk and encourage us to look deeper. Have you ever checked out DNEX, which is a buffet stock disguised as a technology/cap goods company? He once said that you should look for toll bridges disguised as something else. This one fits the bill, but like you, I won't gush forth until someone says WOW.