mayyieldabettermeasureofthefuture.Inaddition,asfirms
growandmature,theirreinvestmentneeds(andrates)tendto
decrease.Forfirmsthathaveexpandedsignificantlyoverthe
priorfewyears,thehistoricalreinvestmentrateislikelytobe
higherthantheexpectedfuturereinvestmentrate.Forthese
firms,industryaveragesforreinvestmentratesmayprovidea
betterindicationofthefuturethanusingnumbers fromthe
past. Finally, it is important to continue treating R&D
expensesandoperatingleaseexpensesconsistently.TheR&D
expenses, in particular, need to be categorized as part of
capital expenditures for purposes of measuring the
reinvestment rate.
The reinvestment rate for a firm can be negative if its
depreciationexceedsitscapitalexpendituresoriftheworking
capitaldeclines substantiallyduringthecourse oftheyear.
For most firms, this negative reinvestment rate will be a
temporaryphenomenonreflectinglumpycapitalexpenditures
orvolatileworkingcapital.Forthesefirms,thecurrentyear’s
reinvestmentrate(whichisnegative)canbereplacedwithan
averagereinvestmentrateoverthelastfewyears.Forsome
firms, though, the negative reinvestment rate may be a
reflectionofthepoliciesofthefirmsandhowwedealwithit
will depend upon why the firm is embarking on this path:
- Firmsthathaveoverinvestedincapitalequipmentor
workingcapitalin thepast maybeabletolive off
past investmentfor a numberof years, reinvesting
littleandgeneratinghighercashflowsforthatperiod.
If thisis thecase,we shouldnot use thenegative
reinvestment rate in growth forecasts and should
estimategrowthbasedonimprovementsinreturnon
capital.Oncethefirmhasreachedthepointwhereit