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.