Hes giving shareholders a 13 percent return their capital including borrowed

Hes giving shareholders a 13 percent return their

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growing the business. He’s giving shareholders a 13 percent return on their capital, including borrowed capital. And he’s doing it consistently over the long term without seeing ROIC drop. This tells us that he’s paying attention to our interests. With interest rates at 1 percent, I’m quite happy with a 13 percent return on my capital. Now let’s take a look at the long-term growth numbers: sales, earnings, equity, and cash. The most important growth number is Equity. If you owned a company and, for some strange reason, it suddenly stopped doing business, collected all the money the business was owed, sold off everything it owned, and then paid off all its debts, the amount of money you’d have left would be its Equity (also known as “book value”). I like the Equity growth rate the best, because it’s the hardest number to manipulate and is going to be the closest we can get to the real rate of growth of value. So now let’s click on the Ten Year Summary, the last menu item on the list in the middle of the page.
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We want the Book Value/Share column. Remember, Book Value is the same as Equity; by viewing it “per share,” we’re looking at it even more accurately. You can see that back in 1999, BVPS was $6.60. That means there was $6.60 of equity for every share of stock. As of March 2008 there was $24.02 per share. Look at the growth from 1999 to 2008. Is BVPS growing consistently? Yes. Are there any years when it didn’t grow or went negative? Even in great businesses there can be bad years. (In Rule #1 we go through an analysis of the growth rate for ten years, seven years, five years, three years, and one year to be sure of consistency. You can do that if you like. But it’s okay to get good enough at looking at numbers to see that the growth is consistent. If you’re not sure, dump the numbers onto an Excel spreadsheet and look at them on a graph.) In that ten-year period, RL grew its equity at about 15 percent per year. Quite good.
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Before you get too comfortable with what you’re seeing on the Ten Year Summary, you should check the most recent book-value numbers. And to see that, you’ll have to look at the Balance Sheet. Click on Financial Results: Statements: Balance Sheet. Click the Interim button; this’ll give you the most recent batch of quarterly reports. Look at the most recent quarterly balance sheet, and near the bottom you’ll see the line for Equity. That’s the same as book value but it’s not per share. Luckily, right below the Equity line is the Shares line. Just divide the shares into the Equity. In this case, $2,694.4 divided by 98.7 is $27 book value per share. Still growing. Calculating Growth Rates I didn’t guess at that 15 percent number for the growth, by the way. To get that number you can use an Excel spreadsheet formula or, even better, go to my website at PaybackTimeBook.com and use the calculator designed to do it for you. Alternatively, you can get good at the Rule of 72 and approximate it.
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