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Sycamore Networks Inc  (OTCPK:SCMR) Forward Rate of Return (Yacktman) %: -27.25% (As of Jan. 2013)

Yacktman defines forward rate of return as the normalized free cash flow yield plus real growth plus inflation. Sycamore Networks Inc's forward rate of return for was -27.25%.

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.


Historical Data

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

* Premium members only.

Sycamore Networks Inc Annual Data

Jul03 Jul04 Jul05 Jul06 Jul07 Jul08 Jul09 Jul10 Jul11 Jul12
Forward Rate of Return (Yacktman) % Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only -21.54 -6.55 11.38 -17.36 -22.77

Sycamore Networks Inc Quarterly Data

Apr08 Jul08 Oct08 Jan09 Apr09 Jul09 Oct09 Jan10 Apr10 Jul10 Oct10 Jan11 Apr11 Jul11 Oct11 Jan12 Apr12 Jul12 Oct12 Jan13
Forward Rate of Return (Yacktman) % Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only -21.96 -22.74 -22.77 -24.22 -27.25

Competitive Comparison
* Competitive companies are chosen from companies within the same industry, with headquarter located in same country, with closest market capitalization; x-axis shows the market cap, and y-axis shows the term value; the bigger the dot, the larger the market cap.


Calculation

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).

Sycamore Networks Inc's Forward Rate of Return of Jan. 2013 is

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

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


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