Value-Based Management 453
NOPAT/sales ratio is 5.6 percent, which is excellent for its industry, but even though
it is profitable, it has negative free cash flows. This is because Home Depot is still in
its high-growth phase, which requires enormous investments in operating capital.
When we forecast out to the point where Home Depot’s sales growth slows due to
market saturation, its free cash flows become very large and positive, which explains
its high MVA of $148 billion. Note also that Home Depot currently has an expected
ROIC of 19.6 percent versus a WACC of only 10.5 percent. This large spread con-
tributes to its $148 billion MVA.
Table 12-9 shows the value drivers for Bell’s two divisions, measured at 2007, the
end of the forecast period. We report these for the end of the forecast period because
ratios can change during the forecast period due to input changes. By the end of the
forecast period, however, all inputs and ratios should be stable.
Table 12-9 shows that both divisions have the same growth rate and the same
WACC. Bell Memory is more profitable, but it also has much higher capital require-
ments. The result is that Bell Memory’s expected ROIC is only 9.5 percent, well
Who Is Creating Wealth?
A recent article inFortunedemonstrates the relationship
between wealth creation as measured by Market Value
Added (MVA) and the spread between the return on in-
vested capital (ROIC) and the cost of capital (WACC). The
accompanying table shows that companies such as Mi-
crosoft and Intel have created enormous MVA by having a
large spread between ROIC and WACC, even though they
employ relatively small amounts of capital. On the other
hand, Wal-Mart and Citigroup created extraordinary MVA
with a relatively small spread between ROIC and WACC
because they are earning that spread on a large amount of
capital. Cisco has a small spread and low capital base, but
very strong growth prospects, which explains its large MVA.
The table also shows some companies with negative MVAs.
Note that all of them have a negative spread: Their return on
capital is less than investors expect. These negative MVAs can-
not be attributed solely to industry conditions. Several pairs of
wealth creators and destroyers are in the same industries: Wal-
Mart versus Kmart, Burlington Northern Santa Fe versus
CSX, GE versus Raytheon, and Citigroup versus BankOne.
MVA (billions of dollars) Capital (billions of dollars) ROIC WACC
Wealth Creators
General Electric (GE) $502 $76 17.2% 12.5%
Microsoft (MSFT) 389 20 51.8 12.6
Cisco Systems (CSCO) 378 24 13.7 12.8
Wal-Mart Stores (WMT) 177 54 14.3 11.0
Intel (INTC) 281 30 30.6 12.0
Citigroup (C) 113 75 14.3 12.8
Burlington Northern 1 20 8.2 8.1
Santa Fe (BNI)
Wealth Destroyers
CXS (CSX) $ 1 $18 4.0% 7.0%
Raytheon (RTN) 5 27 5.3 7.9
Kmart (KM) 7 20 4.8 7.7
BankOne Corporation 9 46 8.5 12.0
(ONE)
Sources:Geoffrey Colvin, “America’s Best and Worst Wealth Creators,” Fortune, December 18, 2000, 207–216; and http://www.sternstewart.com.
450 Corporate Valuation, Value-Based Management, and Corporate Governance
