Recently I was reading the 2015 annual report of Walmart. Sure, it is a great business, and has rewarded its long term shareholders in more than a meaningful way. Yet, that does not make it unprejudiced.
Walmart said its return on investment was 16.9% and 17% for 2015 and 2014 respectively. I wouldn't have debated much, if it was left at that; ambiguous, yet, unarguable at the first instance. However, Walmart was more transparent, which any corporate manager should be, about its definition.
And here it is, the way it is calculated by Walmart:
I am always wary of any adjusted numbers. It left me wondering why corporates treat depreciation like the way they do. If it is not part of operating costs, what the heck it is? By the way, I have seen many analysts also doing this. And what is that rent doing there to be added back? Furthermore, just imagine if those interest costs were significant enough to make an impact. There is no consideration of tax expense too; aren't they genuine? I don't even want to go to the denominator. This is a classic mess up of a key performance indicator that is widely used as an input for estimating the value of a business.
We would probably understand if Walmart had instead added back some portion of its advertising costs reasoning that their benefit usually spreads more than a year; but then it should be added back to the denominator as well to be meaningful. I am being simplistic because the asset thus created will have to be amortized and included in operating costs. All this if we consider that Walmart also has brand value which attracts customers, in addition to its low cost premise.
Return on investment (capital) measures the quality of the investment made by a business. The higher the return, the higher the efficiency, and when it exceeds the cost of capital, the business increases its intrinsic value.
Here's Walmart's measure of free cash flows:
I could not figure out whether it is free cash flows to equity, which are after debt considerations, or free cash flows to firm.
This is one reason I don't use service providers' calculation of any number; the outsiders are either sloppy or don't know enough of what they do; probably both most of the time; and they are biased too. It is always better to go to the original source, such as the annual reports, quarterly reports, and company webcasts. And here too it is better to take only the raw data rather than any calculated numbers such as Walmart's return on investment.
Most of the corporates only disclose the calculated numbers, but do not give their basis of calculation. At least Walmart has been more transparent. It is left to the investors to make out of it.
By the way, Walmart repurchased its stock at $75.82 per share in 2015, at $74.99 in 2014, and at $67.15 in 2013. The total cost for three years was $15.3 b. Is it fair given the stock has been languishing for quite sometime? May be a thought for another post.
Walmart said its return on investment was 16.9% and 17% for 2015 and 2014 respectively. I wouldn't have debated much, if it was left at that; ambiguous, yet, unarguable at the first instance. However, Walmart was more transparent, which any corporate manager should be, about its definition.
And here it is, the way it is calculated by Walmart:
I am always wary of any adjusted numbers. It left me wondering why corporates treat depreciation like the way they do. If it is not part of operating costs, what the heck it is? By the way, I have seen many analysts also doing this. And what is that rent doing there to be added back? Furthermore, just imagine if those interest costs were significant enough to make an impact. There is no consideration of tax expense too; aren't they genuine? I don't even want to go to the denominator. This is a classic mess up of a key performance indicator that is widely used as an input for estimating the value of a business.
We would probably understand if Walmart had instead added back some portion of its advertising costs reasoning that their benefit usually spreads more than a year; but then it should be added back to the denominator as well to be meaningful. I am being simplistic because the asset thus created will have to be amortized and included in operating costs. All this if we consider that Walmart also has brand value which attracts customers, in addition to its low cost premise.
Return on investment (capital) measures the quality of the investment made by a business. The higher the return, the higher the efficiency, and when it exceeds the cost of capital, the business increases its intrinsic value.
Here's Walmart's measure of free cash flows:
I could not figure out whether it is free cash flows to equity, which are after debt considerations, or free cash flows to firm.
This is one reason I don't use service providers' calculation of any number; the outsiders are either sloppy or don't know enough of what they do; probably both most of the time; and they are biased too. It is always better to go to the original source, such as the annual reports, quarterly reports, and company webcasts. And here too it is better to take only the raw data rather than any calculated numbers such as Walmart's return on investment.
Most of the corporates only disclose the calculated numbers, but do not give their basis of calculation. At least Walmart has been more transparent. It is left to the investors to make out of it.
By the way, Walmart repurchased its stock at $75.82 per share in 2015, at $74.99 in 2014, and at $67.15 in 2013. The total cost for three years was $15.3 b. Is it fair given the stock has been languishing for quite sometime? May be a thought for another post.
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