If the company were unprofitable at the operating income line, using the reinvestment rate is not going to be feasible. Suppose we’re tasked with calculating the reinvestment rate of a company using the following assumptions.įrom the financials listed above, we can reasonably assume the company is relatively mature, given how depreciation as a percentage of CapEx is 80%. Capex, Depreciation and Net Working Capital Assumptions We’ll now move to a modeling exercise, which you can access by filling out the form below. Learn More → Reinvestment Rate and Growth by Industry ( Damodaran) Reinvestment Rate Calculator – Excel Template While increased spending by a company can drive future growth, the strategy behind where the capital is being spent is just as important.Ī clear trend of reduced reinvestment, in contrast, could simply mean that the company is more mature, as reinvestment opportunities tend to decline in the later stages of a company’s life cycle. If a company consistently has an above-market rate of reinvestment, yet its growth lags behind peers, the takeaway is that the capital allocation strategy of the management team could be suboptimal. In practice, a company’s implied rate of reinvestment can be compared to that of industry peers, as well as a company’s own historical rates.Ĭompanies with higher reinvestment activity should exhibit higher operating profit growth – albeit, the growth might require time to realize. The formula for calculating the reinvestment rate is as follows.Įxpected EBIT Growth = Reinvestment Rate * ROIC net operating profit after taxes (NOPAT). Step 3: Lastly, the value of the reinvestment is divided by the tax-affected EBIT, i.e.Step 2: Next, the change in net working capital (NWC) is added to the result from the prior step, representing the dollar amount of reinvestment.Step 1: First, we calculate net CapEx, which is equal to capital expenditures minus depreciation.The calculation of the rate of a company’s reinvestment is a three-step process: Return on Invested Capital (ROIC): The profitability (%) earned by a company using its equity and debt capital.Reinvestment Rate: The proportion of NOPAT re-invested into capital expenditures (CapEx) and net working capital (NWC). The expected growth rate in operating income is a byproduct of the reinvestment rate and the return on invested capital (ROIC). How to Calculate Reinvestment Rate (Step-by-Step) NOPAT) that is allocated to capital expenditures (Capex) and net working capital (NWC). The Reinvestment Rate measures the percentage of a company’s after-tax operating income (i.e.
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