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Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: KwanK who wrote (103522)	2/21/1999 7:37:00 PM
From: Mohan Marette	Read Replies (1) \| Respond to of 176387

Here is one way to skin the 'CAT' (ROIC) & this is a good thing... Kwan: This is one way to do it. Anyway why do you want to do the calculation for DELL again ,you don't trust them???? ==================== (Source: I don't recall.) >>>'In essence, what ROIC looks to capture is the amount of cash generated by the company's ongoing operations relative to the capital needed to generate that cash. As a result, return on invested capital is simply the company's net operating profit after tax (NOPAT) divided by its invested capital. NOPAT is equal simply to sales minus operating expenses minus taxes. (Keep out interest earnings or one-time deals from the sales number.) To find "invested capital," just take a company's assets, subtract its current liabilities, then subtract the cash it has on the balance sheet. This is the amount of money the company has spent on working assets less the normal cash that flows in and out. (To figure out a company's ROIC for a given period, you need to calculate these numbers at the beginning of the period and at the end, and average them.) A company like Dell has few assets--relative to its sales--and high liabilities, since it waits to pay its suppliers until after it gets paid by its customers. As a result, its return on invested capital is astronomical. This is a good thing if you're a Dell shareholder.

To: KwanK who wrote (103522)	2/21/1999 8:07:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 176387

KwanK, There are many different ways of calculating ROIC, and before I tell you how I calculate mine let me just summarize the idea behind ROIC. Basically, what you are trying to figure out is how efficient management is in deploying assets under its control. Another way of expressing the idea is ROAM (return of assets under management). These approaches avoid the pitfalls of ROE (return on equity) because ROE is very sensitive to leverage. The numerator I use is operating income. This is pretax income and it does not include interest. The denominator I use is the sum of equity plus long-term debt. Alternatively, you might use fixed assets plus inventory plus A/R as the denominator. But in every case the denominator needs to be the calculated from the previous period's report. So, for the year we would have operating income of $2,046, and we would have equity of $1,293 and LT debt of $261, for a denominator of $1,554. That would yield an ROIC of 132%. Dell uses a different calculation. The exact method of calculation matters less than using it consistently, because its primary function is comparative (one company period to period, or one company compared to another), not absolute. Actually, the method I like best is to use free cash flow as the numerator (before taxes), and assets under management plus accumulated depreciation as the denominator. The idea is you get a cash on cash return. Hope this helps, CTC