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Discover Financial Services (NYSE:DFS)
Return on Capital (Joel Greenblatt)
611.96% (As of Mar. 2014)

Joel Greenblatt defined Return on Capital differently in his book The Little Book That Still Beats the Market (Little Books. Big Profits). He defines Return on Capital as EBIT divided by the total of net fixed assets and net working capital. Discover Financial Services's annualized return on capital (Joel Greenblatt) for the quarter that ended in Mar. 2014 was 611.96%.

DFS' s 10-Year Return on Capital - Joel Greenblatt Range
Min: 22.39   Max: 726.92
Current: 603.06

22.39
726.92

During the past 12 years, Discover Financial Services's highest Return on Capital (Joel Greenblatt) was 726.92%. The lowest was 22.39%. And the median was 424.77%.

DFS's Return on Capital - Joel Greenblattis ranked higher than
87% of the 129 Companies
in the Global Credit Services industry.

( Industry Median: 33.33 vs. DFS: 603.06 )

Discover Financial Services's 3-Year average Growth Rate of Return on Capital (Joel Greenblatt) was 13.80% per year.


Definition

Joel Greenblatt defined Return on Capital differently in his book The Little Book That Still Beats the Market (Little Books. Big Profits) . He defines Return on Capital as follows:

Return on Capital=EBIT/(Net fixed Assets + Net Working Capital)

EBIT stands for Earnings Before Interest and Taxes. It is also called operating income.

Fixed Assets are also known as non-current assets. They include the property, plant, and equipment that the firm needs in its operation.

GuruFocus calculates net working capital as: (Accounts Receivable + Inventory + Other Current Assets) - (Accounts Payable + Other Current Liabilities). We're trying to account for OPERATING assets and liabilities (part of daily business) when calculating working capital. Cash and marketable securities are considered NON-OPERATING assets and are not included in calculation. We will also back out all interest bearing debt, short term debt and the portion of long term debt that is due in the current period from the current liabilities. This debt will be considered when computing cost of capital and it would be inappropriate to count it twice.

Working Capital(Q: Mar. 2014 )
=(Accounts Receivable + Inventory + Other Current Assets) - (Accounts Payable + Other Current Liabilities)
=(0 + 0 + -8731) - (3273 + -3397)
=-8607

When net working capital is negative, 0 is used.

So Joel Greenblatt’s Return on Capital of Discover Financial Services for the quarter that ended in Mar. 2014 can be restated as:

Return on Capital (Joel Greenblatt’s)(Q: Mar. 2014 )
=EBIT/(Net fixed Assets + Net Working Capital)
=Operating Income/(Net Property, Plant and Equipment+Net Working Capital)
=4088/(668 + max(-8607, 0))
=611.98 %

Note: The Operating Income data used here is four times the quarterly (Mar. 2014) operating income data.

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


Explanation

The way Joel Greenblatt defines Return on Capital is a more accurate measure of how efficiently the company generates returns onthe capital actually invested in the business. EBIT is used instead of net income because the tax and interest payment may be affected by factors other than the core business operation. Intangible assets are not included in the calculation because they don’t need to be replaced.

Joel Greenblatt uses his definition of Return on Capital and Earnings Yield (Joel Greenblatt) to rank companies.


Related Terms

Operating Income, Net Property, Plant and Equipment, Accounts Receivable, Inventory, Other Current Assets, Accounts Payable, Other Current Liabilities


Historical Data

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

Discover Financial Services Annual Data

Nov05Nov06Nov07Nov08Nov09Nov10Nov11Nov12Dec12Dec13
ROC_JOEL 0.0022.39265.24300.02424.77275.43726.92702.81699.63603.06

Discover Financial Services Quarterly Data

Feb12May12Aug12Nov12Dec12Mar13Jun13Sep13Dec13Mar14
ROC_JOEL 833.88704.36778.80644.08626.76755.24646.44592.16573.08611.96
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