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GuruFocus has detected 7 Warning Signs with Western Digital Corp \$WDC.
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Western Digital Corp (NAS:WDC)
ROC %
8.34% (As of Dec. 2016)

Return on capital measures how well a company generates cash flow relative to the capital it has invested in its business. It is also called Return on Invested Capital (ROIC). Western Digital Corp's annualized return on capital (ROC) for the quarter that ended in Dec. 2016 was 8.34%.

As of today, Western Digital Corp's weighted average cost Of capital is 8.95%. Western Digital Corp's return on capital is 4.62% (calculated using TTM income statement data). Western Digital Corp earns returns that do not match up to its cost of capital. It will destroy value as it grows.

Definition

Western Digital Corp's annualized Return on Capital (ROC) for the fiscal year that ended in Jun. 2016 is calculated as:

 Return on Capital (ROC) (A: Jun. 2016 ) = NOPAT / Average Invested Capital = Oper. Inc.*(1-Tax Rate) / ( (Invested Capital (A: Jun. 2015 ) + Invested Capital (A: Jun. 2016 )) /2) = 466 * ( 1 - -58.17% ) / ( (6489 + 19761) /2) = 737.0722 / 13125 = 5.62 %
 Invested Capital (A: Jun. 2015 ) = Book Value of Debt + Book Value of Equity - Cash = Long-Term Debt + Short-Term Debt + Minority Interest + Total Equity - Cash = 2149 + 407 + 0 + 9219 - 5286 = 6489

 Invested Capital (A: Jun. 2016 ) = Book Value of Debt + Book Value of Equity - Cash = Long-Term Debt + Short-Term Debt + Minority Interest + Total Equity - Cash = 13660 + 3334 + 0 + 11145 - 8378 = 19761

Western Digital Corp's annualized Return on Capital (ROC) for the quarter that ended in Dec. 2016 is calculated as:

 Return on Capital (ROC) (Q: Dec. 2016 ) = NOPAT / Average Invested Capital = Oper. Inc.*(1-Tax Rate) / ( (Invested Capital (Q: Sep. 2016 ) + Invested Capital (Q: Dec. 2016 )) /2) = 2180 * ( 1 - 26.79% ) / ( (19583 + 18704) /2) = 1595.978 / 19143.5 = 8.34 %

where

 Invested Capital (Q: Sep. 2016 ) = Book Value of Debt + Book Value of Equity - Cash = Long-Term Debt + Short-Term Debt + Minority Interest + Total Equity - Cash = 13055 + 78 + 0 + 10775 - 4325 = 19583

 Invested Capital (Q: Dec. 2016 ) = Book Value of Debt + Book Value of Equity - Cash = Long-Term Debt + Short-Term Debt + Minority Interest + Total Equity - Cash = 12944 + 129 + 0 + 10732 - 5101 = 18704

Note: The Operating Income data used here is four times the quarterly (Dec. 2016) operating income data.

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

Explanation

Return on Capital measures how well a company generates cash flow relative to the capital it has invested in its business. It is also called Return on Invested Capital. 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.

As of today, Western Digital Corp's weighted average cost Of capital is 8.95%. Western Digital Corp's return on capital is 4.62% (calculated using TTM income statement data). Western Digital Corp earns returns that do not match up to its cost of capital. It 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 local exchange's currency.

Western Digital Corp Annual Data

 Jun07 Jun08 Jun09 Jun10 Jun11 Jun12 Jun13 Jun14 Jun15 Jun16 ROC 79.27 60.65 24.46 65.17 31.15 36.36 16.67 28.18 23.60 5.62

Western Digital Corp Quarterly Data

 Sep14 Dec14 Mar15 Jun15 Sep15 Dec15 Mar16 Jun16 Sep16 Dec16 ROC 28.33 28.98 24.44 13.96 17.95 16.33 5.44 -4.61 6.37 8.34
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