|
||
|
||
Green Stocks |
|
Rule #1 - Do not lose money! Rule #2 - Never forget rule number 1! ( by: Warren Buffet )For comments or questions please email: : admin@equityresearch.com |
||
Return on CapitalOne of the best ways to tell if a company is doing well is to look at the return on capital invested. It is a simple, but powerful way to look at a company. It is considered a better calculation than to simply look at earnings because it gives a larger picture and can not be manipulated so easily.Return on Capital ExampleSuppose the earnings were the same. In company A you had to invest $1,000 dollars to get $10.00 of earnings. In company B, you had to invest $2,000 dollars to get a return of $10.00. Which company is the better investment. It seems obvious that it is company A, but what are the return differences. Company A will have a return of 10% (10/1000) and Company B will have a return of 5%(10/2000).From this calculation you can quickly find out which companies are good at generating lots of cash with little money. Even in competitive environments, some companies can continually generate a lot better returns on equity than others. To find the companies, you have to do the calculation. The Formula for ROC and EBITThe formula is Return on Capital = Earnings Before Interest and Taxes / (Net Working Capital + Fixed Assets). This is a good way to get information. You can take the Return on Capital and divide it by the Net Working Capital + Fixed Assets and get the Earnings Before Interest and Taxes. Computing the formula this way will give you a much better idea if the company is profitable or not.Legendary investor Joel Greenblatt recommends using EBIT to get earnings instead of looking at reported earnings that can be manipulated more easily. GlossaryNet Working Capital = Current Assets – Current Liabilities Fixed Assets = Property, Plant, equipment, etc. |
|||
 |
|
|