Cheat Sheet

Key Concepts:

• • ROIC (Return on Invested Capital)

    • = Net Operating Profit After Tax (NOPAT) / Invested Capital (IC)

    • = (NOPAT / Sales) x (Sales / Invested Capital) <--- The DuPont Identity

  • WACC (Weighted Average Cost of Capital), i.e., required return

    • DCF (Discounted Cash Flow)

  • g (Growth)

    • EVA = (ROIC - WACC) x IC

  • "Economic Moat"

    • "Barriers to entry" that help a company maintain higher ROIC than WACC

    • Without barriers to entry, competition will inevitably reduce ROIC down to WACC

Attractive investment targets are usually characterized by:

• • High ROIC;

    • High profit margin (NOPAT/Sales), and/or

    • Low capital investment requirement, i.e. high IC turnover ratio (=Sales/IC)

  • Low required return by investors (i.e. low WACC);

  • High growth

    • But only if ROIC>WACC

  • A wide and deep "Economic Moat".

SEC Beginners' Guide to Financial Statements

Porter's 5-Forces Analysis

• http://www.quickmba.com/strategy/porter.shtml

• http://www.investopedia.com/features/industryhandbook/porter.asp