inthatyearanddivideitbythetotalcapitalinvestedinthat
firm in that year. The former number comes from our
estimatesofrevenuegrowthandoperatingmargins,whilethe
lattercanbeestimatedbyaggregatingthereinvestmentsmade
bythefirmallthewaythroughthefutureyear.Forinstance,a
firmthathas $500millionincapital investedtodayand is
requiredtoreinvest$300millionnextyearand$400million
theyearafterwillhavecapitalinvestedof$1.2billionatthe
end of the second year.
Forfirmslosingmoneytoday,thereturnoncapitalwillbea
negativenumberwhentheestimationbeginsbutimproveas
marginsimprove.Ifthesales-to-capitalratioissettoohigh,
thereturnoncapitalinthelateryearswillbetoohigh,andif
itissettoolow,thereturnoncapitalwillbetoolow.Toolow
orhighrelativetowhat,youask?Therearetwocomparisons
thatareworthmaking.Thefirstistotheaveragereturnon
capital formature firms in thebusiness in which thefirm
operates.Thesecondistothefirm’sowncostofcapital.A
projectedreturnoncapitalof 40 percentforafirmwithacost
ofcapitalof 10 percentinasectorwherereturnsoncapital
hover around 15 percent is an indicator that the firm is
investing too little for the projected revenue growth and
operatingmargins.Decreasingthesales-to-capitalratiountil
the return on capital converges on 15 percent would be
prudent.
ILLUSTRATION 4.12: Estimated Sales-to-Capital Ratio:
Sirius
To estimatehowmuchSiriusRadiowillhaveto investto
generatetheexpectedrevenuegrowth,weestimatethecurrent