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Valspar Corp (NYSE:VAL)
Return on Capital
17.93% (As of Oct. 2014)

Return on capital measures how well a company generates cash flow relative to the capital it has invested in its business. Valspar Corp's annualized return on capital (ROC) for the quarter that ended in Oct. 2014 was 17.93%.


Definition

Valspar Corp's annualized Return on Capital (ROC) for the fiscal year that ended in Oct. 2014 is calculated as:

Return on Capital (ROC)(A: Oct. 2014 )
=(EBIT - Adjusted Taxes)/Average Total Capital
=Net Income/( (Total Capital (A: Oct. 2013 ) + Total Capital (A: Oct. 2014 ))/ 2 )
=345.401/( (2367.527 + 2344.704)/ 2 )
=345.401/2356.1155
=14.66 %

where

Total Capital(A: Oct. 2013 )
=Book Value of Debt + Book Value of Equity - Cash
=Total Current Assets + Property, Plant and Equipment + Other Current Assets
=1580.29 + 633.475 + 153.762
=2367.527

Total Capital(A: Oct. 2014 )
=Book Value of Debt + Book Value of Equity - Cash
=Total Current Assets + Property, Plant and Equipment + Other Current Assets
=1577.257 + 645.102 + 122.345
=2344.704

Valspar Corp's annualized Return on Capital (ROC) for the quarter that ended in Oct. 2014 is calculated as:

Return on Capital (ROC)(Q: Oct. 2014 )
=(EBIT - Adjusted Taxes)/Average Total Capital
=Net Income/( (Total Capital (Q: Jul. 2014 ) + Total Capital (Q: Oct. 2014 ))/ 2 )
=432.224/( (2475.872 + 2344.704)/ 2 )
=432.224/2410.288
=17.93 %

where

Total Capital(Q: Jul. 2014 )
=Book Value of Debt + Book Value of Equity - Cash
=Total Current Assets + Property, Plant and Equipment + Other Current Assets
=1688.35 + 643.069 + 144.453
=2475.872

Total Capital(Q: Oct. 2014 )
=Book Value of Debt + Book Value of Equity - Cash
=Total Current Assets + Property, Plant and Equipment + Other Current Assets
=1577.257 + 645.102 + 122.345
=2344.704

Note: The Net Income data used here is four times the quarterly (Oct. 2014) net income data.

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.


Explanation

Return on Capital measures how well a company generates cash flow relative to the capital it has invested in its business. The reason book values of debt and equity are used is because the book values are the capital the company received when issuing the debt or receiving the equity investments.

There are four key components to this definition. The first is the use of operating income rather than net income in the numerator. The second is the tax adjustment to this operating income, computed as a hypothetical tax based on an effective or marginal tax rate. The third is the use of book values for invested capital, rather than market values. The final is the timing difference; the capital invested is from the end of the prior year whereas the operating income is the current year’s number.

Why is Return on Capital important?

Because it costs money to raise capital. A firm that generates higher returns on investment than it costs the company to raise the capital needed for that investment is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases, whereas a firm that earns returns that do not match up to its cost of capital will destroy value as it grows.


Be Aware

Like ROE and ROA, ROC is calculated with only 12 months of data. Fluctuations in the company’s earnings or business cycles can affect the ratio drastically. It is important to look at the ratio from a long term perspective.


Related Terms

Return on Equity, Return on Assets, Return on Capital (Joel Greenblatt)


Historical Data

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.

Valspar Corp Annual Data

Oct05Oct06Oct07Oct08Oct09Oct10Oct11Oct12Oct13Oct14
ROC 10.6711.8410.739.099.6812.19-6.9114.0212.7914.66

Valspar Corp Quarterly Data

Jul12Oct12Jan13Apr13Jul13Oct13Jan14Apr14Jul14Oct14
ROC 15.8613.6610.2914.0916.3510.789.1414.5116.0017.93
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