Investment Research, Valuation

Analyzing Growth via Acquisitions and Debt

Recently I was looking at John Wiley & Sons (JWA). One of its stated aims is to grow the company by making acquisitions, which it does several times a year. In that situation, revenues, assets, liabilities, equity, etc. will grow as the financials of the acquired company are added onto JWA’s financials. How then do you analyze such a company when its growth is not fueled by its normal operations? (I suppose some can argue that making acquisitions _is_ part of their normal business operations, but let’s not go into that =)

One specific point about JWA is that it funds its acquisitions via bank debt. This additional debt changes the company’s Cost of Capital. One key way to analyze whether such acquisitions are good for the company, is to compare the ROIC with the Cost of Capital, both before and after the acquisition. ROIC is very much like the “interest rate” the company is earning on its invested assets, while the Cost of Capital is the interest rate the company is paying. Naturally then, we would want the ROIC to be as high above the Cost of Capital as possible.


No comments yet.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Copyright © 2005-2014 All Rights Reserved.

Enter your email address to follow this blog and receive notifications of new posts by email.

Blog Stats

  • 399,269 hits
%d bloggers like this: