Calculate long-term growth rate
Step 1: Calculate Return on capital
- NOPAT
- Debt+equity
Return on capital = NOPAT/ (Debt+equity)
N.B.:
- Calculate NOPAT
Revenue |
-Cost of goods sold |
=Gross profit |
-Selling, general & administration |
=EBITDA |
-Estimated depreciation |
=EBIT |
EBIT |
-Taxes @ 35% |
=NOPAT |
+Estimated depreciation |
=Cash flow from operations |
- Debt are long-term obligations (listed on Balance sheet)
Step 2: Calculate Reinvestment rate
- Change in net fixed assets
- +Change in net working capital
- =Net investment
- NOPAT
Reinvestment rate=Net investment/NOPAT
Step 3: Calculate long-term growth rate
g=Return on capital*reinvestment rate