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Walgreen Co (NYSE:WAG)
Return on Capital
-3.89% (As of Aug. 2014)

Return on capital measures how well a company generates cash flow relative to the capital it has invested in its business. Walgreen Co's annualized return on capital (ROC) for the quarter that ended in Aug. 2014 was -3.89%.

Definition

Walgreen Co's annualized Return on Capital (ROC) for the fiscal year that ended in Aug. 2014 is calculated as:

 Return on Capital (ROC) (A: Aug. 2014 ) = (EBIT - Adjusted Taxes) / Average Total Capital = Net Income / ( (Total Capital (A: Aug. 2013 ) + Total Capital (A: Aug. 2014 )) / 2 ) = 1932 / ( (24296 + 24801) / 2 ) = 1932 / 24548.5 = 7.87 %

where

 Total Capital (A: Aug. 2013 ) = Book Value of Debt + Book Value of Equity - Cash = Total Current Assets + Property, Plant and Equipment + Other Current Assets = 11874 + 12138 + 284 = 24296

 Total Capital (A: Aug. 2014 ) = Book Value of Debt + Book Value of Equity - Cash = Total Current Assets + Property, Plant and Equipment + Other Current Assets = 12242 + 12257 + 302 = 24801

Walgreen Co's annualized Return on Capital (ROC) for the quarter that ended in Aug. 2014 is calculated as:

 Return on Capital (ROC) (Q: Aug. 2014 ) = (EBIT - Adjusted Taxes) / Average Total Capital = Net Income / ( (Total Capital (Q: May. 2014 ) + Total Capital (Q: Aug. 2014 )) / 2 ) = -956 / ( (24350 + 24801) / 2 ) = -956 / 24575.5 = -3.89 %

where

 Total Capital (Q: May. 2014 ) = Book Value of Debt + Book Value of Equity - Cash = Total Current Assets + Property, Plant and Equipment + Other Current Assets = 11928 + 12088 + 334 = 24350

 Total Capital (Q: Aug. 2014 ) = Book Value of Debt + Book Value of Equity - Cash = Total Current Assets + Property, Plant and Equipment + Other Current Assets = 12242 + 12257 + 302 = 24801

Note: The Net Income data used here is four times the quarterly (Aug. 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

Historical Data

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

Walgreen Co Annual Data

 Aug05 Aug06 Aug07 Aug08 Aug09 Aug10 Aug11 Aug12 Aug13 Aug14 ROC 11.10 11.06 11.71 11.25 9.23 9.02 11.45 9.03 10.35 7.87

Walgreen Co Quarterly Data

 May12 Aug12 Nov12 Feb13 May13 Aug13 Nov13 Feb14 May14 Aug14 ROC 9.18 6.05 6.94 12.28 10.05 10.68 11.42 12.36 11.84 -3.89
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