ROE (Return on Equity) eller avkastning på eget kapital brukar användas för att se hur pass väl ett bolag genererar avkastning. Naturligtvis måste man ta hänsyn till skuldsättningen också då ett högre ROE kan åstadkommas genom ökad belåningen. Ett bolag med låg skuldsättningen men som ändock lyckas ha en hög ROE är generellt ett attraktivt investeringsobjekt då det tyder på att bolaget "har något" i sin affärsmodell utöver det vanliga.
Ihållande högt ROE indikerar också att bolaget lyckas förvalta de vinstmedel man behåller inom bolaget på ett bra sätt. Det är ju också det man vill se hos bolag, att de enbart behåller den mängd kapital som de kan förränta på ett bra sätt. Allt annat bör ju delas ut eller användas till återköp (om gynnsamt) hellre än förslösas på investeringar som genererar dålig avkastning.
David Einhorn, förvaltare av Greenlight Capital och författare (tillsammans med Joel Greenblatt) till boken Fooling some of the people all of the time, lyfter dock fram en del saker kring ROE som man i första hand kanske inte tänker på. Nedan följer hans tankegångar:
"My two cents on ROEs is that there are two types of businesses: there are capital intensive businesses and non-capital intensive business. Capital in this definition is both fixed assets and working capital.
I define a capital intensive business as a business where the size of the business is limited by the amount of capital invested in it. In these businesses, growth requires another plant, a distribution center, a retail outlet or simply capital to fund growing accounts receivable or inventory. Examples include almost all traditional manufacturing companies, distribution companies, most financial institutions and retailers.
I define non-capital intensive businesses as businesses where growth is limited by things other than capital. Generally, this means intellectual capital or human resources. Examples of intellectual capital are in the pharmaceutical, computer software industries and even some consumer goods like Coke, which rely on brand equity rather than shareholders equity. For example, drug companies are generally limited by the composition of their patent portfolios rather than by their raw manufacturing capacity. Human resource companies are the ones known for the “business going up and down the elevator” every day. Most service companies qualify, including almost any company that sells labor whether it be nurses, construction workers or consultants.
I believe that it is irrelevant to worry about ROE or marginal return on capital in non-capital intensive businesses. If Coke or Pfizer had twice as many manufacturing plants, the incremental sales would be minimal. If Greenlight Capital – and here I mean the management company that receives the fees, and not the funds themselves – had twice as many computers and conference room tables we wouldn’t earn twice the fees…in fact, they probably wouldn’t increase at all.
When the capital doesn’t add to the returns, then ROE doesn’t matter. It follows from this that in non-capital intensive businesses the price-to-book value ratio is irrelevant. The equity of the company in the form of intellectual property, human capital or brand equity is not reflected on the balance sheet. All that matters is how long, sustainable or even improvable the company’s competitive advantage is, whether it is intellectual property, human resources or market position.
For these companies the “reinvestment” question becomes what do they do with the cash. Do they return it to shareholders? Or do they do something worse with the cash? Think of all the beautiful non-capital intensive businesses that have either bought or entered capital intensive areas…mostly because their core business generated more profits than they knew what to do with.
A current example is the investment banks. Think about investment banking. It should be a wonderful non-capital intensive business. People go up the elevator and generate fees. Fees for corporate finance advice. Fees for raising capital. The top firms also benefit from their brand equity as companies actually measure their status by the perceived brand value of their financial advisors. They get still more fees for assisting buy-side customers to execute transactions in the capital markets and serving as custodians for their assets. None of this requires a lot of capital. From there, they can generate more revenue by facilitating customer orders, by committing some capital and by lending them money. So the investment banks become a bit more capital intensive. This has evolved. Next the banks enter proprietary trading and investing – generally in everything from short-term trades in liquid securities to merchant banking or private equity efforts. All that cash flow from the great non-capital intensive businesses gets sucked into ever growing balance sheets. Before you know it, the investment banks are holding on-balance-sheet assets of 30x their equity in addition to tons of off-balance-sheet swaps and derivatives.
What does all this capital-intensive activity do? It drives down the ROEs. Sure the ROEs still seem good at around 15-20%. But when you consider that underneath all the capital intensive stuff is a wonderful non-capital intensive fee-generating business that should have an astronomical ROE, you see that all the proprietary investing and leverage isn’t adding much to shareholder returns here. The irony of this is that these are the companies that everyone else comes to in order to get advice on corporate finance and capital allocation.
Why did this happen? They say that the reason is to diversify the business to stabilize the results, as the fee streams are too volatile for the tastes of public investors. In my view that is a lot of value to destroy in order to stabilize results that are still pretty volatile.
I suspect a better explanation is the investment banks are run for their employees rather than their shareholders. They are run so that there is just enough shareholder return left so that shareholders don’t complain too loudly and a 15-20% ROE seems to be that level. Of course, the returns could be higher, but around 50% of the revenues go to employee compensation.
Given the risk taking nature of the incremental revenues and the fact that 50% of the revenues go to employee compensation, the investment banks are evolving into hedge funds with…how shall I put this?…above-market incentive compensation fee structures.
Coming back to my main theme. I believe it is very important to analyze ROE and marginal returns on capital…but only in capital intensive businesses. It may surprise you, but I prefer at the right price capital intensive businesses with low ROEs, where I think the ROE will improve, to high-, or at least medium-ROE businesses.
The problem with high ROEs in capital intensive businesses is that it is hard to sustain the ROEs. Here, high returns attract competition both from new entrants that come with new capital and existing competitors that try to see what the better performing competitor is doing to copy it. The new capital and the copycats often succeed in driving down the superior ROEs. Really bad things happen to earnings when a 25% ROE turns into a 10% ROE.
This is why I prefer the low ROEs. Great things happen to earnings when a 10% ROE becomes a 15% ROE. ROE can improve three ways: better asset turns, better margins and by adding financial leverage. I like to look for companies that can expand the ROEs in as many of these levers as possible."
Lågt ROE med kapacitet att höja den gäller med andra ord för David Einhorn. Tankeväckande, i alla fall för mig som mest fokuserat på att identifiera bolag med redan högt ROE.
Tidigare har David framgångsrikt lyckats identifiera bolag som är på väg att råka illa ut. Vilket hans bok bl.a. handlar om. Han har också gjort sig känd för att sedan ett par år tillbaka hållit fram Apple som ett bolag på frammarsch. Något som tydligen också infriats. Senaste intervjun jag såg med honom nu i somras så framhöll han fortfarande Apple som det främsta, stora, tillväxtscaset och att bolagets framgångar antagligen kommer fortsätta ännu några år framöver. Vi får se om han får rätt i även det, men det skulle inte förvåna mig om det blev så. (Apple utgör det enskilt största innehavet i hans Greenlight Capitals portfölj, ca 13%. Näst största innehav och som han ökade i senast under Q2 är Seagate Technology).
Vad är din syn på ROE/avkastning på eget kapital?
Hur ser du på David Einhorns beskrivning av investmentbanker?
Vad tror du om Apple och dess framtid?