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Power-One, Inc. (NAS:PWER)
Forward Rate of Return
7.30% (As of Mar. 2013)

Yacktman defines forward rate of return as the normalized free cash flow yield plus real growth plus inflation. Power-One, Inc.'s forward rate of return for was 7.30%.

Unlike the Earnings Yield, the Forward Rate of Return uses the normalized Free Cash Flow of the past seven years, and considers growth. The forward rate of return can be thought of as the return that investors buying the stock today can expect from it in the future.

Definition

Forward Rate of Return is a concept that Don Yacktman uses in his investment approach. Yacktman explained the forward rate of return concept in detail in his interview with GuruFocus. Yacktman defines forward rate of return as the normalized free cash flow yield plus real growth plus inflation. He said in the interview (March 2012, when the S&P 500 was at about 1400):

If the business is stable, this calculation is fairly straightforward. For instance, on the S&P 500 we would normalize earnings. We would then calculate what percentage of those earnings are not reinvested in the underlying businesses and are therefore free. Historically, for the S&P 500, this has been just under 50% of earnings. Currently, we expect the S&P to earn about 70 on a normalized basis, a number which is far below reported earnings due to our adjusting for record high profit margins. \$70 X ½ / 1400 gives you a normalized free cash flow yield of approximately 2.5%.

The historical real growth rate of the S&P 500 (companies) is about 1.5%. Assuming an inflation rate of 2.5%, the forward rate of return on an investment in the S&P 500 is about 6.5% today (2.5% free cash flow yield plus 1.5% real growth plus 2.5% inflation).

Power-One, Inc.'s Forward Rate of Return of Mar. 2013 is

 Forward Rate of Return = Normalized Free Cash Flow / Price + Growth rate = 0 / 4.14 + 0 = 0.00 %

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

Explanation

Unlike the Earnings Yield, the Forward Rate of Return uses the normalized Free Cash Flow of the past seven years, and considers growth. The forward rate of return can be thought of as the return that investors buying the stock today can expect from it in the future.

For the growth part of the Forward Rate of Return calculation, GuruFocus uses the lower of total revenue growth or per share revenue growth, and the growth rate is always capped at 20%. For the Free Cash Flow we use per share data averaged over seven years. The reason we use seven years is because research shows that seven years is the length of the typical business cycle.

Be Aware

In the Forward Rate of Return calculation, the growth rate is added directly to todays free cash flow yield. Therefore the calculation is reliable only if the company can grow at the same rate in the future as it did in the past. Investors should pay close attention to this when researching growth stocks. More accurate measurement return returns are Return on Capital.

Related Terms

Free Cash Flow

Historical Data

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

Power-One, Inc. Annual Data

 Dec03 Dec04 Dec05 Dec06 Dec07 Dec08 Dec09 Dec10 Dec11 Dec12 RateOfReturn -11.40 -5.68 -8.15 -1.66 -1.29 -4.26 -17.14 -1.75 2.20 7.52

Power-One, Inc. Quarterly Data

 Dec10 Mar11 Jun11 Sep11 Dec11 Mar12 Jun12 Sep12 Dec12 Mar13 RateOfReturn -1.75 -0.29 0.98 1.61 2.20 2.81 1.63 4.49 7.52 7.30
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