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Discover Financial Services  (NYSE:DFS) ROC %: 9.16% (As of Jun. 2017)

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 ROIC %. Discover Financial Services's annualized return on capital (ROC) for the quarter that ended in Jun. 2017 was 9.16%.

As of today, Discover Financial Services's WACC % is 7.51%. Discover Financial Services's return on capital is 9.46% (calculated using TTM income statement data). Discover Financial Services generates higher returns on investment than it costs the company to raise the capital needed for that investment. It 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.

Historical Data

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

Discover Financial Services Annual Data

 Nov07 Nov08 Nov09 Nov10 Nov11 Nov12 Dec13 Dec14 Dec15 Dec16 ROC % 9.46 9.74 9.04 8.69 9.35

Discover Financial Services Quarterly Data

 Aug12 Nov12 Mar13 Jun13 Sep13 Dec13 Mar14 Jun14 Sep14 Dec14 Mar15 Jun15 Sep15 Dec15 Mar16 Jun16 Sep16 Dec16 Mar17 Jun17 ROC % 10.19 10.29 8.99 9.44 9.16

Calculation

Discover Financial Services's annualized Return on Capital (ROC) for the fiscal year that ended in Dec. 2016 is calculated as:

 Return on Capital (ROC) (A: Dec. 2016 ) = NOPAT / Average Invested Capital = Operating Income*(1-Tax Rate) / ( (Invested Capital (A: Dec. 2015 ) + Invested Capital (A: Dec. 2016 )) /2) = 3656 * ( 1 - 34.55% ) / ( (26353 + 24852) /2) = 2392.852 / 25602.5 = 9.35 %

 Invested Capital (A: Dec. 2015 ) = Book Value of Debt + Book Value of Equity - Cash = Long-Term Debt & Capital Lease Obligation + Current Portion of Long-Term Debt + Minority Interest + Total Equity - Cash = 24650 + 0 + 0 + 11275 - 9572 = 26353

 Invested Capital (A: Dec. 2016 ) = Book Value of Debt + Book Value of Equity - Cash = Long-Term Debt & Capital Lease Obligation + Current Portion of Long-Term Debt + Minority Interest + Total Equity - Cash = 25443 + 0 + 0 + 11323 - 11914 = 24852

Discover Financial Services's annualized Return on Capital (ROC) for the quarter that ended in Jun. 2017 is calculated as:

 Return on Capital (ROC) (Q: Jun. 2017 ) = NOPAT / Average Invested Capital = Operating Income*(1-Tax Rate) / ( (Invested Capital (Q: Mar. 2017 ) + Invested Capital (Q: Jun. 2017 )) /2) = 3468 * ( 1 - 37.02% ) / ( (22925 + 24747) /2) = 2184.1464 / 23836 = 9.16 %

where

 Invested Capital (Q: {Q2}) = Book Value of Debt + Book Value of Equity - Cash = Long-Term Debt & Capital Lease Obligation + Current Portion of Long-Term Debt + Minority Interest + Total Equity - Cash = 26823 + 0 + 0 + 11265 - 15163 = 22925

 Invested Capital (Q: Jun. 2017 ) = Book Value of Debt + Book Value of Equity - Cash = Long-Term Debt & Capital Lease Obligation + Current Portion of Long-Term Debt + Minority Interest + Total Equity - Cash = 26438 + 0 + 0 + 11259 - 12950 = 24747

Note: The Operating Income data used here is four times the quarterly (Jun. 2017) 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 ROIC %. 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, Discover Financial Services's WACC % is 7.51%. Discover Financial Services's return on capital is {stock_data.stock.roic}}% (calculated using TTM income statement data). Discover Financial Services generates higher returns on investment than it costs the company to raise the capital needed for that investment. It 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.

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.

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