Executive Summary
Value is created when a company generates a return on its invested capital that is greater than the cost of that capital. All other metrics are vanity. The core drivers of Shareholder Value are:
- NOPLAT (Net Operating Profit Less Adjusted Taxes): The unlevered, after-tax cash profit generated from core operations.
- Invested Capital (IC): The total capital from all sources (debt and equity) used to fund the company’s net operating assets.
- ROIC (Return on Invested Capital): The primary measure of operational efficiency (NOPLAT / Invested Capital). It is the truest gauge of a company’s ability to generate cash from its asset base.
- WACC (Weighted Average Cost of Capital): The blended rate of return required by the company’s capital providers (shareholders and lenders). It represents the minimum acceptable return, the hurdle rate for value creation.
- Economic Profit: The ultimate measure of value creation or destruction. Calculated as
(ROIC - WACC) * Invested Capital. A positive number signifies value creation; a negative number signifies value destruction.
Our analysis will focus exclusively on these drivers.
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